To be clear, split-dollar life insurance is not an insurance product but rather an arrangement to purchase and fund life insurance between two parties, generally an employee and an employer.

Basically, an agreement is made under which a life insurance policy is purchased on an individual. The employer will pay all or a portion of the premiums on the policy, depending on the arrangement. When the individual dies, the employer receives a portion of the death benefit equal to the amount paid in premiums. The remaining benefit goes to the individual’s beneficiaries.

For example, if a $200,000 policy were purchased for an individual who died after the employer had paid $28,000 in premiums, then the employer would get back the money it had paid in premiums and $172,000 would go to the insured individual’s beneficiaries.

This agreement is attractive to both parties because the employer recoups its money and the employee receives a life insurance policy at a better rate because the company is picking up all or a portion of the cost. The death benefit is free of income tax for both parties as well.

A split-dollar life insurance arrangement can be used for a variety of reasons.

• Split-dollar life insurance can be used to fund a buy-sell agreement.
• It can be used as a benefit to recruit and retain quality executives.
• Business owners who might not otherwise be able to afford life insurance might benefit from a split-dollar arrangement.

There are different ways to set up split-dollar life insurance. Usually, the individual owns the policy and designates beneficiaries, then by absolute assignment transfers to the employer an amount equal to the premiums paid by the employer. In this case, the individual retains all ownership rights, but when the individual dies, the employer is reimbursed before the individual’s named beneficiaries are paid. If the individual leaves the company, any cash value in the policy would be used to repay the company.

In other arrangements, the policy can be purchased by the employee and assigned to the employer as collateral in exchange for the employer paying the premiums. Because the company holds the policy as collateral, it can be confident that it will recoup the money spent on the insurance premiums.

In some cases, the employer can take out a life insurance policy on the employee. The employer names itself as a beneficiary of an amount equal to the cash value and designates that any funds in excess of that amount will be paid to the individual’s beneficiaries.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. Give TLC a call with your questions.

Tax on long-term capital gains

Tax on dividends

Employee/individual contribution limits

¹ Must aggregate employee contributions to all 401(k), 403(b), SAR-SEP, and SIMPLE plans of all employers. 457(b) plan contributions are not aggregated. For SAR-SEPs, the percentage limit is 25% of compensation reduced by elective deferrals (effectively, a 20% maximum contribution).

² Special catch-up limits may also apply to 403(b) and 457(b) plan participants.

Employer contribution/benefit ³ limits

³ For self-employed individuals, compensation generally means earned income. This means that, for qualified plans, deductible contributions for a self-employed individual are limited to 20% of net earnings from self-employment (net profits minus self-employment tax deduction), and special rules apply in calculating the annual additions limit.

Compensation limits/thresholds

Individuals seeking medical coverage on their own can explore purchasing an individual health insurance policy. And those aged 65 and older may qualify for Medicare coverage.

There are three general classifications of medical insurance plans: fee-for-service (indemnity), managed care (e.g., HMOs and PPOs), and high-deductible health plan (HDHP). Older persons may be eligible for Medicare coverage.

Fee for Service

With a basic fee-for-service (indemnity) insurance plan, doctors and hospitals are paid a fee for each service provided to insured patients.

Indemnity plans normally cover hospitalization, outpatient care, and physician services in or out of the hospital. You select the service provider (physician) for consultation or treatment. You are then billed for the service and reimbursed by the insurance company, or you can “assign” direct payment to the provider from the insurance company. Indemnity plans typically require the payment of premiums, deductibles, and coinsurance. Limits on certain coverage or exclusions may apply. Because many policies have lifetime limits on benefits that the insurance company will pay, you should look for a policy with a lifetime limit of at least $1 million.

Managed Care

Managed-care plans became popular in the 1990s as a way to help rein in rising medical costs. In managed-care plans, insurance companies contract with a network of doctors and hospitals to provide cost-effective health care. Managed-care plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.

Health maintenance organization. An HMO operates as a prepaid health-care plan. You normally pay a monthly premium in addition to a small copayment for a visit to a physician, who may be on staff or contracted by the HMO. Copayments for visits to specialists may be higher. The insurance company typically covers the amount over the patient copayment amount.

Each covered member chooses or is assigned a primary-care physician from doctors in the plan. This person acts as a gatekeeper for his or her patients and, if deemed necessary, can refer patients to specialists who are on the HMO’s list of providers. Because HMOs contract with doctors and physicians, costs are typically lower than in indemnity plans.

Preferred provider organization. A PPO is a managed-care organization of physicians, hospitals, clinics, and other health-care providers who contract with an insurance company to provide health care at reduced rates to individuals insured in the plan. The insurance company uses actuarial tables to determine “reasonable and customary” fees for each type of service, and health-care providers accept the PPO’s fee schedule and guidelines.

The insured can see any doctor or hospital within a preferred network of providers and pays a copayment for each visit. Insured individuals have to meet an annual deductible before the insurance company will start covering health-care services. Typically, the insurance company will pay a high percentage (often 80%) of the costs to the plan’s health-care providers after the deductible has been met, and patients pay the balance.

Although insured individuals can choose physicians or providers outside the plan without permission, patient out-of-pocket costs will be higher; for example, the initial deductible for each visit is higher and the percentage of covered costs by the insurance company will be lower. Because PPOs provide more patient flexibility than HMOs, they may cost a little more.

Point-of-service plan. A POS health-care plan mixes aspects of an HMO and a PPO to allow greater patient autonomy. POS plans also use a network of preferred providers whom patients must turn to first and from whom patients receive referrals to other providers if deemed necessary. POS plans recommend that patients choose a personal physician from inside the network. The personal physician can refer patients to other physicians and specialists who are inside or outside the network. Insurance companies have a national network of approved providers, so insured individuals can receive services throughout the United States. Copays tend to be lower for a POS plan than for a PPO plan.

High-Deductible Health Plan

An HDHP provides comprehensive coverage for high-cost medical bills and is usually combined with a health-reimbursement arrangement that enables participants to build savings to pay for future medical expenses. HDHP plans generally cover preventive care in full with a small (or no) deductible or copayment. However, these plans have higher annual deductibles and out-of-pocket limits than other insurance plans.

Participants enrolled in an HDHP can open a health savings account (HSA) to save money that can be used for current and future medical expenses. There are annual limits on how much can be invested in an HSA. The funds can be invested as you choose, and any interest and earnings accumulate tax deferred. HSA funds can be withdrawn free of income tax and penalties provided the money is spent on qualified health-care expenses for the participant and his or her spouse and dependent children.

Remember that the cost and availability of an individual health insurance policy can depend on factors such as age, health (pre-existing conditions), and the type of insurance purchased. In addition, a physical examination may be required.

Medicare

Medicare is the U.S. government’s health-care insurance program for the elderly. It is available to eligible people aged 65 and older as well as certain disabled persons. Part A provides basic coverage for hospital care as well as limited skilled nursing care, home health care, and hospice care. Part B covers physicians’ services, inpatient and outpatient medical services, and diagnostic tests. Part D prescription drug coverage is also available.

Medicare Advantage is a type of privately run insurance plan that includes Medicare-approved HMOs, PPOs, fee-for-service plans, and special needs plans. Some plans offer prescription drug coverage. To join a Medicare Advantage plan, you must have Medicare Part A and Part B and you have to pay the monthly Medicare Part B premium to Medicare, as well as the Medicare Advantage premium.

Medicare Supplement Insurance, or Medigap, is sold by private insurance companies and is designed to cover the deductibles and copayments that Medicare doesn’t cover. At one point, there were more than 200 different policies available. Then the National Association of Insurance Commissioners stepped in and created 10 standard packages of coverage, designated by the letters A through J. Since June 2010, plans E, H, I, and J have not been sold, although you are able to keep your plan if you already had one of these plans before June 2010. There are also two new policies (plans M and N) that offer different benefits and premiums. Plans D and G bought on or after June 1, 2010, have different benefits than D and G plans bought before June 1, 2010 (although the benefits won’t change for those who participated in these plans prior to June 1). Only Medigap insurers are able to offer these plans. Although each standardized plan is identical from insurer to insurer, prices may differ and all these plans may not be available in every state.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. Give TLC a call if you’ve got questions.

Social Security

¹ The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included a 2% reduction in the Social Security (OASDI) portion of FICA tax for 2011.

² The Temporary Payroll Tax Cut Continuation Act of 2011 extended the 2% reduction through February of 2012.

Medicare

² Most beneficiaries paid the same $96.40 or $110.50 premium in 2011 as they did in 2010. However, new enrollees or beneficiaries who did not have their premium withheld paid $115.40.

Medicaid

³ Amounts listed actually effective as of July of prior year; different amounts apply to Alaska and Hawaii.

¹ Basic exclusion amount plus deceased spousal unused exclusion amount (exclusion is portable for 2011 and 2012)

² The GST tax exemption is not portable

2011 through 2012 gift and estate tax rate schedule

Under the sunset provision of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the gift and estate and GST tax exemptions referenced above will revert to $1 million in 2013, and the maximum tax rate will revert to 55%.

According to the report, they allegedly used a gun to force taxpayers to give them money out of their tax refund checks.

Read the article.

This is an IRS issue and impacts returns regardless of who sends them in to the IRS. This is not a Drake issue.

If you have received an acknowledgement of your tax return from the IRS, then the IRS assures us they have received your return and are processing it.

Information on the status of your refund will be updated in “Where’s My Refund” once your return processes. This is a temporary situation, and we expect to resolve the matter in a few days.

IRS expects the vast majority of tax refunds to continue to be issued within the historical range of 10 to 21 days.