Retirement Pension Benefits Standards

This article discusses retirement pension benefits standards. The bottom line in retirement planning today ... Don 't count benefits that you've been counting on. With the general restructuring and cost-cutting efforts, many companies have been finding ways to terminate or reduce their pension obligations. Changes to watch out for ... Companies often take workers' Social Security payments into account when figuring pension benefits. They reason that since they paid half of those premiums, they're entitled to reduce their share of your defined benefits by half of whatever you'll be receiving from Social Security.

Problem: Most employees think of their pension benefits as separate from Social Security. Somewhat helpful: The Tax Act of 1986 specified that in most cases employers can't subtract more than 50% of your pension benefits, regardless of how much you receive from Social Security.

Protection: Ask your employer annually for a benefits statement showing how much you would receive at retirement if you left the company now or at various points in the future. You'll find, for example, that if you were to retire at 55 instead of at 65, most companies would cut your pension benefits in half. Be sure to ask for the figures with and without salary increases, since those are, of course, not guaranteed.
Never assume that pension benefit projections will hold up 100%. Often they turn out to have been too optimistic. Goal: To replace at least 50%-70% of your final salary. That's considered a minimum for living in relative comfort during retirement. See pension benefits for more information.

Many executives who think they have adequate life insurance through company policies do not. By the time they find out-often at retirement-the cost of doing anything about insurance coverage can be prohibitive. There is a way for the company to pay for a key executive's life insurance at a substantial savings in premium costs.
Most executives lose their group life insurance coverage when they retire and find that the cost of individual coverage-if available is exorbitant. Solution: A post-retirement life reserve plan which enables a company to make tax-deductible life insurance premium payments during the executive's working years so that when he retires he has a fully paid-up policy with benefits he can count on.
How it works: In addition to its regular group term insurance, the company buys a post-retirement life reserve policy for an executive. The money paid for this policy each year goes to fund a tax-free trust that earns interest. The policy is converted to fully paid upon retirement. If the executive dies or leaves the company before retirement, all the money plus interest is returned to the trust to be used to pay insurance premiums on the others still in the firm.

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Example: A company wants to insure the life of a 45-year-old executive for $100,000. It pays $650 a year for group term insurance and, in addition, puts aside $2,000 a year to build up a reserve for his post-retirement years. At age 55, the group term insurance premiums have risen to $1,500 a year, but the reserve premiums are still $2,000 annually.

If the executive dies at 55: His family receives $100,000 under the group term policy. The entire $20,000 (plus interest) that has built up in the reserve trust in the 10 years is returned to the trust (reducing the company's future cost).
If the executive lives to 65 and beyond: The trust (which now has $40,000 plus interest in it) supersedes the group term policy. The executive has $100,000 in insurance for the rest of his life. No future payments are required.
In addition to getting a $100,000 policy for $40,000 (instead of $90,000), the company takes a deduction for these premium payments.
Estate planning. The post-retirement life reserve policy can be used to make sure the executive's family has enough liquid assets to pay estate taxes. (No tax if spouse receives the money.) The insurance is also a good way to make a gift to beneficiaries. For the $40,000 pre-tax cost of the post-retirement life reserve policy, the holder makes a $100,000 tax-free bequest.

Closely held companies. Any corporation can set up a post-retirement life reserve, but it's most advantageous for the owner of a closely held corporation or members of a professional corporation (such as commonly formed by accountants, lawyers, and doctors). However, the new law permits payment of tax over 14 years. Principals in a closely held company can also structure the plan so it benefits them more than others.
Setting up a plan. Benefits can be determined by length of service or by compensation level. Caution: All plans within a company must be consistent. Thus, if a chief executive and a vice president have been with the company for 20 years and the benefits are determined solely on length of service, both are entitled to the same benefits. A company can lose its tax deduction and face potential penalties if the plan favors an individual.

Idea for founders: Chances are the company founder has been there longer than anyone else. Structure the benefits based on length of service only. But, if there are many long-time employees, consider basing the benefits on salary only, because his is likely to be the highest.
Companies that should not use the postretirement reserve: Those doing only marginally well. It's dangerous to be committed to the additional long-term expense of funding such a benefit.
Recommended: Have an expert organize the plan as a 501(r)( q) Trust and get IRS approval:
Important: The $50,000 limit on the amount of tax-free insurance an employee can receive is not necessarily a good reason to limit coverage to that amount. Reason: The saving on group rates usually more than offsets taxes the employee must pay premiums for the additional coverage.

Source: Consumer Information Center

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