Saving for retirement cannot take place in a vacuum. Whether your clients just are starting out or nearing retirement, they need to be aware of the risks they face.

Risk is usually defined as the potential for loss. When most people think of financial risk, they focus on investment risk and the potential for loss due to downturns in the economy, changing interest rates, inflation or poor management of the companies in which they invest. One typically addresses these risks through diversification of assets: selecting different investments across industry sectors.

But risk of loss also arises from life events such as illness, disability or death. And if your clients are business owners, they have additional considerations to keep in mind. Between company retirement plans and other assets, they are likely to have an idea about what they need, and will have, when they reach retirement. But have they considered the impact of sudden medical expenses or a long-term disability on their retirement plans?

In addition to unexpected pre-retirement medical expenses, post-retirement medical and long term care expenses can decrease retirement income assets. According to a February 2003 study from the Employee Benefit Research Institute, for the average individual who has reached age 65 in 2003, the amount needed to pay future retirement medical expenses ranges from $50,000 to $1.5 million even after considering Medicare.

Expenses for LTC require additional savings. Consequently, business owners need to protect their retirement assets and those of their long-term employees against medical, drug and LTC expenses after retirement.

Fortunately, a business owner can help plan for disability, LTC and medical costs on a tax-favored basis. One method used by large corporations that is gaining acceptance in the medium to small business market is a funded single employer welfare benefit plan.

This generic name describes an arrangement established by an employer to provide miscellaneous welfare benefits to employees and beneficiaries. In my practice, I follow a simple checklist of questions to help an employer identify situations in which a single employer welfare benefit plan funded through a trust may be worth considering:

o Is the business structured other than as a sole proprietorship?

o Is the business profitable and seeking to provide tax-deductible fringe benefits to employees and dependents?

o Is the business interested in any of the following: Helping loyal employees to protect against expenses that could exhaust their retirement income? Having funds available to provide for post-retirement life insurance, long term care and/or medical expenses? Establishing a “golden handcuff” program to help retain key employees?

o Is the business willing to comply with nondiscrimination requirements, knowing that an employee’s termination prior to entitlement age will result in forfeiture of the benefit back to the plan?

o Does the business have recurring cash flow?

o Would the business like some flexibility with regards to contributions to a benefit plan?

If the answer to most of these questions is “yes,” then a funded single employer welfare benefit plan may be a viable approach to helping the business owner prepare for post-retirement health benefits.

Before pursuing this approach, an employer would be well advised to consult with a legal and/or tax advisor to ensure a full understanding of the issues and to confirm whether the plan is appropriate. Should the employer decide to proceed, a specialized third-party administrator (TPA) is imperative to make sure the plan is operated in a compliant manner. The independent TPA typically would be responsible for preparation of proposal material and plan documents, annual calculations, plus annual reporting required for such welfare plans.

From the small business owner’s perspective, medical insurance, optical and dental services, and potential LTC needs are a certainty in retirement. While certain risks and expenses cannot be avoided, they can be managed.

The answer is to be prepared for the unexpected; using insurance can make good business sense. Insurance that can be paid for from assets held in a funded single employer welfare benefit plan is simply a way to fund known costs on a tax-favored basis.