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Retirement Planning > Retirement Investing

Think 419(e) For Covering Post-Retirement Health Care Epenses

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If some of your boomer clients are worried about how to cover out-of-pocket health care costs in retirement, then consider asking them if their employer offers a 419(e) welfare benefit plan. The single-employer plan features a pre-retirement death benefit and post-retirement medical benefits, all funded with life insurance.

“No other vehicle on the market offers the same tax advantages,” says Jeff Gitterman, a principal of Woodbridge, N.J.-based Integrity Financial Partners, which markets the plans to brokers via life insurance carriers. “The plan lets employee-participants make pre-tax contributions and, upon retirement, tax-free withdrawals to cover medical expenses.”

Given the scant amount of planning that boomers devote to meeting post-retirement health care expenses, rising interest in the 419(e) comes none too soon. Nearly 20% of pre-retirees surveyed in an October 2005 report from the Financial Planning Association and Women’s Policy Inc. said they spent “no time” in the past year planning for retirement.

More than 30% of those polled–individuals in the 45-54 and 55-64 age brackets each accounted for a third of those surveyed–don’t know what to anticipate for their health care needs. And nearly 40% have spent less than an hour planning for health benefits in retirement.

Because of this lack of attention, boomers vastly are underestimating health costs. Fifty-two percent of the survey respondents expect to spend less than $300 per month on out-of-pocket costs and health care-related expenses. That’s less than half of the $640 per month that the average retiree spends, according to the report.

“Post-retirement health care needs have not been a strong focus of boomers,” says Tracey Baker, vice president of Cooper, Jones & McLeland, Fairfax, Va., and chairman of the National Capital Area chapter of the Financial Planning Association, Denver, Colo. “People are living longer and longer. Many face the danger of outliving their resources.”

To guard against that scenario, Baker urges boomers to work closely with a financial planner when estimating post-retirement medical costs. For do-it-yourselfers, the FPA and health care benefits provider Aetna, Hartford, Conn., established a website, the Healthy Retirement Readiness Tool. The site matches advice to the user’s level of retirement planning and offers “realistic next steps.”

What solutions might boomers consider? Wendy Spencer, a financial planner and principal of Spencer Capital Strategies Inc., Aurora, Colo., favors deferred annuities with living benefits guarantees. She also frequently recommends life insurance policies that feature a long term care rider.

Observers point to other options for retirees who don’t have enough in savings. Among them: withdrawing or borrowing from a life insurance policy’s cash value; surrendering the policy for cash; and, selling a life policy in exchange for a percentage of the death benefit to a life settlement company.

The better option for boomers who can avail themselves of it, says David Neufeld, a principal at Integrity Financial Partners, is the single-employer 419(e) plan. The welfare benefit plan offers business owners and their employees a pre-retirement death benefit and post-retirement medical benefits, each funded with a life insurance policy.

The plan can reimburse participants for a range of health care expenses: medical, dental and psychological care; prescription and over-the-counter drugs; medical-related transportation and lodging; long term care services; nursing home care and home care; premiums for medical, dental, Medicare and long term care coverage; and, even children with special needs.

“Because the plans can be used for dependent care, they provide a unique way for parents to fund a lifetime of expenses, including institutionalization of a child,” says Gitterman.

For advisors, he adds, the plans’ tax advantages are key selling points. Like 401(k)s, participants fund the plans using pre-tax contributions, and employers get a tax deduction for their contribution. Upon retirement, participants can withdraw funds on a tax-free basis to cover medical expenses.

Other insurance products that participants enjoy through their employers, such as permanent life insurance, also can be bundled into the plans, says Neufeld.

To be sure, the 419(e) comes with caveats. Because the plan is subject to non-discrimination rules under ERISA, it must be offered to at least 70% of eligible employees. Employees who don’t work the requisite number of years or leave prior to retirement age (as defined by the employer) forfeit their participation.

There’s another pitfall: disqualification of the plan because the owner used inflation when calculating contributions and tax deductions. Though not permitted under Section 419 and 419(a) of the Internal Revenue Code, Gitterman speculates that 419(e) plans offered by some companies and that boast of very large tax deductions do incorporate an inflation component.

Might Congress eliminate 419(e)’s tax advantages, as it did two years ago with the 419(a)(f)(6) welfare benefit plan? Neufeld thinks not.

“Why would the federal government object to a minimal depletion of tax revenues that ultimately funds major medical expenses the government doesn’t have to fund itself?” he asks. “Congress and the Treasury Department should see it as a benefit to the government.”

The single-employer plan features a pre-retirement death benefit and post-retirement medical benefits, all funded with life insurance

The Positives

419(e) Selling Points

o It’s a single-employer welfare benefit plan that provides a pre-retirement death benefit and post-retirement medical benefits funded with life insurance.

o The plan reimburses participants for range of health care expenses: medical, dental and psychological care; prescription and over-the-counter drugs; medical-related transportation and lodging; etc.

o Employers’ contributions to the plan are tax-deductible.

o Employee-participants make pre-tax contributions to the plan.

o Post-retirement plan withdrawals are tax-free.


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