A TAX ADVANTAGED PLAN

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1 Like many people who have achieved financial success, you understand the benefits that life insurance can provide. A TAX ADVANTAGED PLAN PROVIDING POST RETIREMENT HEALTH CARE & LIFE BENEFITS BUSINESS INSURANCE IFS-A086952

2 MITIGATING THE IMPACT OF POST RETIREMENT HEALTH CARE COSTS As a business owner, you probably have given some thought to your retirement income. You have accumulated money in company retirement plans and other assets, and you likely have an idea of what you will need in order to have a comfortable retirement. But, have you considered what would happen to your retirement lifestyle if sudden medical expenses were to take away the retirement assets you worked so hard to accumulate? What about the lifestyle of any dependents that you might leave behind? The amount needed to pay post retirement health care expenses can be significant. Medical costs are escalating with such items as prescription medications, expensive new technology, and inflation contributing to significant and relentless increases. It is easy to see how one s retirement savings can disappear. You might be wondering if there is anything you can do as a business owner to help mitigate the impact post retirement health care costs can have on your retirement assets and those of your employees.

3 2 POST RETIREMENT BENEFITS THROUGH A SINGLE EMPLOYER WELFARE BENEFIT PLAN One solution is to set aside funds using tax-deductible business contributions to provide post retirement health care and life insurance benefits under the terms of a single employer welfare benefit plan. 1 A single employer welfare benefit plan is a generic name used to describe any one of several plans established by a single business to provide miscellaneous welfare benefits to its employees and their dependents. PERMISSIBLE BENEFITS A wide variety of benefits may be provided under a single employer welfare benefit plan including: Medical and hospitalization expenses including insurance premiums, co-pays, deductibles and noninsured medical expenses Prescription and over-the-counter drugs Long-term care, home health care and nursing home expenses Death benefits including individual and survivorship CONTRIBUTION LIMITS AND FLEXIBILITY There are no minimum contribution requirements. Consequently, an employer can skip a contribution in one year and make significant contributions during peak profit years. 1 Single employer welfare benefit plans are covered by 419 and 419A of the Internal Revenue Code.

4 3 ELIGIBLE BUSINESSES With the exception of sole proprietorships, most employers can establish a welfare benefit plan. The business should have recurring cash flow, be profitable enough to support the plan, and be willing to comply with employee participation coverage requirements. EMPLOYEE PARTICIPATION AND VESTING REQUIREMENTS Favorable tax treatment is extended to coverage for employees, their spouses and dependents. Plans are subject to nondiscrimination requirements applicable to the various benefits provided under the plan, although certain classes of employees may be excluded from eligibility without affecting the plan s ability to pass these requirements. Nondiscrimination requirements vary depending upon the benefit provided and upon the structure of the plan. While all eligible employees must participate, welfare benefit plans are not constrained by the vesting schedules imposed on qualified retirement plans. An employer is at liberty to establish an entitlement date requiring lengthy service. If a participant leaves employment prior to reaching the entitlement date his/her benefits must be reallocated among the remaining participants in the plan. This may create effective golden handcuffs to retain key employees. TAX-FAVORED BENEFITS If a plan is structured properly to meet the Internal Revenue Code (IRC) requirements applicable to the relevant welfare benefit, employer contributions to the plan are not taxable to the participants. Medical benefits are generally received income-tax free by participants. If a plan is structured to meet the requirements of IRC 79, only the value of the life insurance protection above $50,000 in coverage - measured by government Table 2001 rates - is currently includable in the participant s income. Although there is no definitive guidance, any death benefits provided to the beneficiaries by a plan may be received income-tax free under IRC 101(a).

5 4 HOW DOES A SINGLE EMPLOYER WELFARE BENEFIT PLAN WORK? The employer meets with a plan administrator who helps to design and adopt a plan. The employer provides the plan administrator with the initial and annually updated employee census data. The plan administrator determines contribution amounts. The employer makes taxdeductible contributions to a trust that has been established to hold the employer s plan assets. The trust receives employer contributions that can be used to purchase life insurance for the ultimate benefit of the employee participants. When life insurance is used to finance the benefit, the welfare benefit trust should be the owner and beneficiary of the policy. The accumulations are used to meet the plan s obligations to the participants and their dependents. 2 The assets of the trust are beyond the reach of the sponsoring employer and its creditors. The plan administrator provides full plan administrative support. When a covered event occurs (e.g., medical expense, long term care) the participant submits a request for payment to the plan administrator who processes the payment of the claim by the trust. Such payments are generally not taxable when paid. RETIREMENT SECURITY FOR YOUR FAMILY A single employer welfare benefit plan can help you preserve your retirement assets for the ones you love. If it s a good idea to save for retirement expenses, it s better yet to fund for those expenses with tax-favored dollars. 2 Loans and withdrawals reduce policy cash values and death benefits, may affect any guarantees against lapse, and may have tax consequences.

6 This document is provided for information and educational purposes only to an individual or entity that may be interested in the purchase of life insurance. It provides general information concerning the use of single employer welfare benefit plans to provide post retirement health and life insurance benefits ( Concept ). Prudential will only act in the capacity of a product provider with regard to the Concept and will not provide the Concept to you. You must obtain the Concept from an individual or entity that is independent of Prudential and who has responsibility for implementing the Concept. Prudential shall not have any involvement, not even as a product provider only, with regard to multi-employer 419A(f)(6) plans. Additionally, Prudential will not provide tax or legal advice and has not endorsed or promoted the use of the Concept nor how a life insurance policy is used within the framework of the Concept. If you desire to use the Concept and purchase life insurance from Prudential, you must also engage the services of your own legal counsel. When you purchase a life insurance policy from us, we will require that you sign a Disclosure Letter that acknowledges that you have discussed the Concept with your independent legal counsel and obtained advice related to the Concept s risks and benefits.

7 Membership promotes ethical market conduct for individual life insurance, long-term care and annuities. Insurance issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates. All are Prudential Financial companies. Each is solely responsible for its own financial condition and contractual obligations. Life insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Your licensed financial professional can provide you with costs and complete details. Prudential Financial and the Rock logo are registered service marks of The Prudential Insurance Company of America and its affiliates The Prudential Insurance Company of America 751 Broad Street, Newark, NJ ALL RIGHTS RESERVED IFS-A Ed. 08/2006 Exp. 02/2008