METs Can Provide Tax Deductible Life Insurance
If the taxpayer accepts the premise that life insurance is one of the most cost- and tax- effective ways to meet business and personal financial planning objectives, the next question asked is: “How can the premiums be paid? Can they be paid with pre-tax, tax-deductible dollars?”
The ideal solution would be to pay the premiums from someone elses pocketbook. The very best scenario would allow the premium payer, typically a business owner, an income-tax deduction without a corresponding income-tax liability.
This is precisely what occurs when an employer becomes a member of a multiple employer trust (MET), structured in accordance with Internal Revenue Code Section (IRC) 419A(f)(6). This subsection of the Code permits employers to structure welfare benefit programs for a select group of employees.
The benefits are not subject to the cumbersome ERISA participation, funding and vesting requirements applicable to qualified pension and profit sharing plans. All employer contributions to a MET are deductible by the employer as ordinary and necessary business expenses under IRC Section 162. And, plan contributions are generally not taxed to participating employees.
Section 419 qualified METs can be used to meet a wide range of benefits (health, disability, education, qualified severance/separation benefits as defined in IRC Section 419(e), etc.). However, METs are often designed to allow business owners to use before-tax business dollars to meet the life insurance liquidity needs of their multimillion dollar estates.
A concomitant by-product of the MET strategy is that the business owner may potentially reduce his corporations accumulated earnings (AE) tax penalty by using any excess earnings to fund the corporations MET obligation. The AE tax is a flat 38.6% excise tax.
There are a variety of METs and each is designed to highlight a particular benefit for participating employees. The employer can choose the type of MET most desirable for his employees. The life insurance MET is the most popular since it provides a solution to the most common business, estate and financial planning needs of the business owner.