U.S. patent application number 11/509227 was filed with the patent office on 2007-01-04 for method and system for providing insurance protection against loss of retirement accumulations in a tax favored defined contribution plan in the event of a participant's disability.
This patent application is currently assigned to Corporate Compensation Plans, Inc. of Connecticut. Invention is credited to Philip T. Davis, Hubert V. Forcier, Janet M. McCune.
Application Number | 20070005463 11/509227 |
Document ID | / |
Family ID | 37018990 |
Filed Date | 2007-01-04 |
United States Patent
Application |
20070005463 |
Kind Code |
A1 |
Davis; Philip T. ; et
al. |
January 4, 2007 |
Method and system for providing insurance protection against loss
of retirement accumulations in a tax favored defined contribution
plan in the event of a participant's disability
Abstract
A system and method for providing insurance protection against
loss of contributions to tax favored defined contribution plans
should an active employee/participant become disabled. The
invention manages the administration of a disability insurance
policy held inside the plan that continues contributions to the
plan during a period of disability, where the coverage amount for
each participant is determined by the level of contributions made
by, or for, each participant.
Inventors: |
Davis; Philip T.; (New
Fairfield, CT) ; McCune; Janet M.; (Plymouth, MN)
; Forcier; Hubert V.; (Minneapolis, MN) |
Correspondence
Address: |
PILLSBURY WINTHROP SHAW PITTMAN LLP
P.O BOX 10500
McLean
VA
22102
US
|
Assignee: |
Corporate Compensation Plans, Inc.
of Connecticut
Danbury
CT
|
Family ID: |
37018990 |
Appl. No.: |
11/509227 |
Filed: |
August 24, 2006 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
|
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09328856 |
Jun 9, 1999 |
7113913 |
|
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11509227 |
Aug 24, 2006 |
|
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|
60088969 |
Jun 10, 1998 |
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Current U.S.
Class: |
705/34 |
Current CPC
Class: |
G06Q 40/08 20130101;
G06Q 30/04 20130101; G06Q 40/02 20130101 |
Class at
Publication: |
705/034 |
International
Class: |
G06Q 50/00 20060101
G06Q050/00 |
Claims
1. A method for using a computer processing system to calculate
benefit and cost amounts under a disability insurance policy so as
to provide substitute continuing payments to a retirement plan into
which contribution payments are normally made on behalf of a
participant of the plan, during a period of non-payment due to a
long-term disability of the plan participant, said disability
insurance being included as a feature of the plan and held as an
asset of the plan's trust, and said insurance premiums being paid
with assets of the trust, the method comprising: a. inputting into
said computer system information relating to said participant's
pre-disability contribution amount; b. based on said information,
calculating with the computer system a premium amount for the
insurance policy and a disability benefit amount under the
insurance policy, said disability benefit amount being
substantially equal to the pre-disability contribution amount; and
c. paying said disability benefit into the retirement plan's trust
as an investment return of the trust, wherein the retirement plan
is subject to non-discrimination requirements with regard to
eligibility for the insurance, and eligibility for the insurance is
matched to eligibility for the plan, or to participation in the
plan, or both, for the plan year prior to the policy year for which
the insurance is effective.
2. The method of claim 1, wherein the retirement plan is a tax
qualified defined contribution 401(a) plan, thereby subjecting said
insurance policy to the terms of said defined contribution plan,
including rules and regulations of the Internal Revenue Service
(IRS) and the Department of Labor (DOL) to which the defined
contribution plan itself is subject.
3. The method of claim 1, wherein the retirement plan is a member
selected from the group consisting of a 401(k) plan, a 403(b) plan,
a 457 plan, a defined benefit pension plan, and a money purchase
pension plan.
4. The method of claim 1, wherein the trust includes an individual
account allocated to each participant and the insurance premium for
each said participant is paid from said participant's account.
5. The method of claim 1, further including calculating a total
annual premium for all plan participants, wherein said total annual
premium is paid on an overall-plan basis from the trust as a plan
expense.
6. The method of claim 5, wherein the trust includes an individual
account allocated to each participant and said total annual premium
is paid from the earnings of the trust prior to the earnings being
allocated to said individual participant accounts.
7. A method for using a computer processing system to calculate
benefit and cost amounts under a disability insurance policy so as
to provide substitute continuing payments to a retirement plan into
which contribution payments are normally made on behalf of a
participant of the plan, during a period of non-payment due to a
long-term disability of the plan participant, said disability
insurance being included as a feature of the plan and held as an
asset of the plan's trust, and said insurance premiums being paid
with assets of the trust, the method comprising: a. inputting into
said computer system information relating to said participant's
pre-disability contribution amount; b. based on said information,
calculating with the computer system a premium amount for the
insurance policy and a disability benefit amount under the
insurance policy, said disability benefit amount being
substantially equal to the pre-disability contribution amount; and
c. paying said disability benefit into the retirement plan's trust
as an investment return of the trust, wherein the plan is subject
to non-discrimination requirements with regard to premiums for the
insurance and benefits under the insurance, and said premiums and
benefits are linked to pre-disability contributions to the plan for
the plan year prior to the policy year for which the insurance is
effective, said pre-disability contributions having been
demonstrated to meet the plan's non-discrimination requirements by
definition or by testing.
8. The method of claim 7, wherein the retirement plan is a tax
qualified defined contribution 401(a) plan, thereby subjecting said
insurance policy to the terms of said defined contribution plan,
including rules and regulations of the Internal Revenue Service
(IRS) and the Department of Labor (DOL) to which the defined
contribution plan itself is subject.
9. The method of claim 7, wherein the retirement plan is a member
selected from the group consisting of a 401(k) plan, a 403(b) plan,
a 457 plan, a defined benefit pension plan, and a money purchase
pension plan.
10. The method of claim 7, wherein the trust includes an individual
account allocated to each participant and the insurance premium for
each said participant is paid from said participant's account.
11. The method of claim 7, further including calculating a total
annual premium for all plan participants, wherein said total annual
premium is paid on an overall-plan basis from the trust as a plan
expense.
12. The method of claim 11, wherein the trust includes an
individual account allocated to each participant and said total
annual premium is paid from the earnings of the trust prior to the
earnings being allocated to said individual participant
accounts.
13. The method of claim 7, wherein said premiums and benefits are
linked to contributions to the plan that, in accordance with the
IRC and its attendant rules and regulations, are based on a
non-discriminatory formula.
14. The method of claim 7, wherein said premiums and benefits are
linked to contributions to the plan that are equal to a fixed
percentage of compensation for all participants in the plan.
15. A machine-readable medium for use in a machine having a central
processing unit (CPU), the medium containing program instructions
executable by the CPU to cause the machine to perform a method of
determining benefit and cost amounts under a disability insurance
policy so as to provide substitute continuing payments to a
retirement plan into which contribution payments are normally made
on behalf of a participant of the plan, during a period of
non-payment due to a long-term disability of the plan participant,
the method comprising: a. receiving information relating to said
participant's pre-disability contribution amount; and b.
calculating, based on said information and in accordance with the
insurance policy and plan provisions, a premium amount for the
insurance policy and a disability benefit amount under the
insurance policy, said disability benefit amount being
substantially equal to the pre-disability contribution amount,
wherein the disability insurance is included as a feature of the
plan and held as an asset of the plan's trust, the insurance
premiums are to be paid with assets of the trust, and the
disability benefits are to be paid into the trust.
16. The machine-readable medium according to claim 15, wherein said
method further comprises accounting premiums paid for, and benefits
paid under, said insurance policy.
17. The machine-readable medium according to claim 16, wherein said
accounting of premiums includes calculating a total annual premium
for all plan participants and allocating the total premium as a
plan expense.
18. The machine-readable medium according to claim 15, wherein said
method further comprises determining said plan participant's
potential eligibility to be a member of a group insured under said
insurance policy.
19. The machine-readable medium according to claim 18, wherein, in
accordance with the provisions of the Internal Revenue Code (IRC)
and its attendant rules and regulations, the plan is subject to
non-discrimination requirements, and wherein said method further
comprises determining compliance with said requirements.
20. The machine-readable medium according to claim 15, wherein the
retirement plan is a tax qualified defined contribution 401(a)
plan.
21. The machine-readable medium according to claim 20, wherein the
insurance policy is subject to the terms of the defined
contribution plan, including rules and regulations of the Internal
Revenue Service (IRS) and the Department of Labor (DOL) to which
the defined contribution plan itself is subject.
22. The machine-readable medium according to claim 15, wherein the
retirement plan is a member selected from the group consisting of a
401(k) plan, a 403(b) plan, a 457 plan, a defined benefit pension
plan, and a money purchase pension plan.
23. The machine-readable medium according to claim 22, wherein the
insurance policy is subject to the terms of the retirement plan,
including rules and regulations of the Internal Revenue Service
(IRS) and the Department of Labor (DOL) to which the retirement
plan itself is subject.
24. A machine-readable medium used in a machine having a central
processing unit (CPU), the medium containing program instructions
executable by the CPU to cause the machine to perform a method of
determining benefit and cost amounts under a disability insurance
policy so as to provide substitute continuing payments to a
retirement plan into which contribution payments are normally made
on behalf of a participant of the plan, during a period of
non-payment due to a long-term disability of the plan participant,
wherein the disability insurance is included as a feature of the
plan and held as an asset of the plan's trust, the insurance
premiums are paid with assets of the trust and the disability
benefits are paid into the trust, and the plan is subject to
non-discrimination requirements with regard to eligibility for the
insurance, the method comprising: a. receiving information relating
to said participant's pre-disability contribution amount; b.
determining said participant's eligibility for the insurance by
matching eligibility for the insurance to eligibility for the plan,
matching eligibility for the insurance to participation in the
plan, or both, for the plan year prior to the policy year for which
the insurance is effective; and c. calculating, based on said
information and in accordance with the insurance policy and plan
provisions, a premium amount for the insurance policy and a
disability benefit amount under the insurance policy, said
disability benefit amount being substantially equal to the
pre-disability contribution amount.
25. The machine-readable medium according to claim 24, wherein said
method further comprises accounting premiums paid for, and benefits
paid under, said insurance policy.
26. The machine-readable medium according to claim 25, wherein said
accounting of premiums includes calculating a total annual premium
for all plan participants and allocating the total premium as a
plan expense.
27. The machine-readable medium according to claim 24, wherein the
retirement plan is a member selected from the group consisting of a
401(k) plan, a 403(b) plan, a 457 plan, a defined benefit pension
plan, and a money purchase pension plan.
28. A machine-readable medium used in a machine having a central
processing unit (CPU), the medium containing program instructions
executable by the CPU to cause the machine to perform a method of
determining benefit and cost amounts under a disability insurance
policy so as to provide substitute continuing payments to a
retirement plan into which contribution payments are normally made
on behalf of a participant of the plan, during a period of
non-payment due to a long-term disability of the plan participant,
wherein the disability insurance is included as a feature of the
plan and held as an asset of the plan's trust, the insurance
premiums are paid with assets of the trust and the disability
benefits are paid into the trust, and the plan is subject to
non-discrimination requirements with regard to premiums for the
insurance and benefits under the insurance, the method comprising:
a. receiving information relating to said participant's
pre-disability contribution amount; b. calculating, based on said
information and in accordance with the insurance policy and plan
provisions, a premium amount for the insurance policy and a
disability benefit amount under the insurance policy, said
disability benefit amount being substantially equal to the
pre-disability contribution amount; and c. linking said premium and
benefit amounts to pre-disability contributions to the plan for the
plan year prior to the policy year for which the insurance is
effective, said pre-disability contributions having been
demonstrated to meet the plan's non-discrimination requirements by
definition or by testing.
29. The machine-readable medium according to claim 28, wherein said
method further comprises accounting premiums paid for, and benefits
paid under, said insurance policy.
30. The machine-readable medium according to claim 29, wherein said
accounting of premiums includes calculating a total annual premium
for all plan participants and allocating the total premium as a
plan expense.
31. The machine-readable medium according to claim 28, wherein the
retirement plan is a member selected from the group consisting of a
401(k) plan, a 403(b) plan, a 457 plan, a defined benefit pension
plan, and a money purchase pension plan.
32. A computer processing system having instructions for effecting
substitute continuing payments into a trust of a retirement plan,
into which contribution payments are normally made on behalf of a
participant of the plan, during a period of non-payment due to a
long-term disability of the plan participant, said system
comprising: a. a disability system having a disability database
that stores data relating to an insurance policy, wherein: (i) the
insurance policy is a feature of said retirement plan; (ii) the
insurance policy is held as an asset of the plan's trust; (iii)
premiums for the insurance policy are paid with assets of the
trust; and (iv) benefit payments under the insurance policy are
paid into the trust; b. a record-keeping system having a
record-keeping database that stores data relating to one or more
sources of money that are deposited into the plan's trust and one
or more funds into which trust assets are invested; c. means for
transmitting data from the record-keeping system to the disability
system; d. means for calculating, based on said data transmitted to
the disability system, said premiums in an amount so that the
benefit payments are substantially equal to the pre-disability
contribution payments; and e. means for accounting premiums paid
for, and benefits paid under, said insurance policy.
33. The system of claim 32, further comprising means for
determining said participant's potential eligibility to be a member
of a group insured under said insurance policy.
34. The system of claim 32, wherein, in accordance with the
provisions of the Internal Revenue Code and its attendant rules and
regulations, the plan is subject to non-discrimination
requirements, and wherein the system further comprises means for
determining compliance with said requirements.
35. The system of claim 32, wherein the retirement plan is a tax
qualified defined contribution 401(a) plan.
36. The system of claim 35, wherein the insurance policy is subject
to the terms of the defined contribution plan, including rules and
regulations of the Internal Revenue Service (IRS) and the
Department of Labor (DOL) to which the defined contribution plan
itself is subject.
37. The system of claim 32, wherein the retirement plan is a member
selected from the group consisting of a 401(k) plan, a 403(b) plan,
a 457 plan, a defined benefit pension plan, and a money purchase
pension plan.
38. The system of claim 37, wherein the insurance policy is subject
to the terms of the retirement plan, including rules and
regulations of the Internal Revenue Service (IRS) and the
Department of Labor (DOL) to which the retirement plan itself is
subject.
39. The system of claim 32, wherein the trust includes an
individual account allocated to each participant, the
record-keeping database stores said source and fund data in
accordance with each participant's account, and the insurance
premium for each said participant is paid from said participant's
account.
40. The system of claim 32, wherein said premiums and benefits are
linked to contributions to the plan that, in accordance with the
IRC and its attendant rules and regulations, are based on a
non-discriminatory formula.
Description
RELATED APPLICATION DATA
[0001] This is a continuation of application Ser. No. 09/328,856,
filed Jun. 9, 1999, now U.S. Pat. No. ______, which claims the
benefit of provisional application Ser. No. 60/088,969, filed Jun.
10, 1998.
BACKGROUND OF THE INVENTION
[0002] 1. Field of the Invention
[0003] The present invention relates generally to the field of
employee benefits, and more specifically to systems and methods for
insuring against loss of retirement benefits. Yet more
particularly, the invention relates to, and is applied to,
retirement plans established under United States Tax Law, and under
Title 26 of the United States Internal Revenue Code.
[0004] 2. Description of the Related Art
[0005] Employee benefits are generally divided into welfare
benefits (such as health care, disability and life insurance),
qualified retirement benefits (may take the form of defined benefit
pension plans or defined contribution plans), and non-qualified
plans (such as executive wealth accumulation programs).
[0006] Under a defined benefit plan, the plan document sets forth a
formula for determining the amount of monthly retirement income to
be paid to an employee after he/she reaches normal retirement (or
some earlier retirement age). This formula is based on the
employee's length of service or a combination of the employee's
length of service and pay (either career pay or final average pay).
The benefit is provided from a trust or annuity contract to which
usually only the employer contributes. The amount of contributions
necessary to provide the promised benefits for the covered work
force is determined under minimum standards set out in federal law
and the actual annual contribution amount is determined by the
employer with the assistance of an actuary. Each employee's benefit
is insured by a federal agency (called the "Pension Benefit
Guaranty Corporation" or "PBGC") and because of the minimum funding
standards and the PBGC insurance, benefits to the employee are not
solely dependent on the accumulations in the trust on behalf of the
employee.
[0007] Defined contribution plans are retirement programs where the
employee's final retirement benefit is determined solely by the
value of an "account" that has been established within the plan for
the benefit of the employee. Contributions to that account and
investment gains or losses of the account during the employee's
working career, are paid to the employee at normal retirement age
(or some earlier age) as specified in the plan document. As is
evident, the amount of the employee's retirement benefit is
directly, and entirely, related to the accumulations in the
employee's account. The PBGC does not insure defined contribution
plans. Employers make contributions to defined contribution plans
using some non-discriminatory formula, such as a percentage of each
employee's compensation as defined by the plan. In addition, if the
plan has a 401(k) feature (26 United States Code 401(k)), employers
may make contributions to the plan based on an employee's election
to defer a portion of his/her cash compensation into the plan (such
contributions are called "employee deferrals"). Plans with 401(k)
features often allow for special employer contributions called
"employer matching contributions" whereby the employer will make an
additional contribution to the employee's account based on the
amount of deferral the employee elects.
[0008] (References to code sections herein, such as 401(k), 401(m),
410(b), 415(c), etc. shall be understood to refer to sections of
the United States Internal Revenue Code, United States Code, Title
26.)
[0009] All qualified retirement plans are required to adhere to
strict tax laws and regulations set forth in the Employee
Retirement Income Security Act of 1974 (ERISA), the Internal
Revenue Code of 1986 as amended (IRC), various Revenue Rulings and
Procedures, and Department of Labor regulations. The general
standards of accuracy and completeness are unusually high. The IRS
demands that plans comply both "in form" and "in operation" with
the tax "qualification requirements." Compliance "in form" means
that the plan document language must comply with all applicable tax
laws and regulations (as interpreted by the IRS). Compliance "in
operation" means that the plan must be administered in strict
adherence to its written provisions--even provisions that have been
adopted solely for design reasons (and would not have needed to
have been adopted to achieve "qualified" status). Both form defects
and operational defects may result in the IRS "disqualifying" the
plan or imposing a "correction program" on the plan. Either result
would have enormous financial implications for the employer
sponsoring the defective plan; therefore, employers are extremely
careful to see that their plans comply with all regulations in
regard to both features and practices.
Loss of Current Income
[0010] The loss of income during a period of long-term disability
has generally been addressed under an employer's welfare benefits
through a long-term disability plan. The employer may choose to
fund this plan through the use of a group long-term disability
contract, individual insurance contracts, a self-insurance
arrangement, or a combination of the above. This plan partially
replaces the loss of regular earnings that would otherwise be paid
during the employee's period of disability. Benefits under these
disability programs typically stop at the individual's "ADEA
cut-off age." For a person who becomes disabled prior to the
attainment of age 60, the ADEA cut-off age is usually age 65. For
workers who become disabled after attaining age 60, the ADEA
cut-off age is usually five years after the commencement of
disability payments. This plan typically does not address the needs
of disabled employees after retirement age. At retirement, a
disabled employee's disability benefit will cease and income must
be provided by a combination of Social Security benefits, qualified
retirement plan benefits, and personal savings.
Loss of Retirement Benefits
[0011] Employees who have been covered by a defined benefit plan
for most of their working career may have a portion of their
retirement income needs met by their qualified retirement plan
benefits, even if they suffer a long-term disability during their
career. Defined benefit plans may provide that if a participant
becomes disabled, service, and if applicable, pay, would be deemed
to continue for purposes of determining the amount of the
retirement benefit provided under the plan's formula. Some plans
also commence paying benefits at the time of disability and
continue paying benefits throughout retirement.
[0012] In contrast, under the typical defined contribution plan, if
a participant becomes disabled and remains disabled beyond a period
of "short-term disability" (during which the employee is usually
compensated through the regular payroll), contributions to the
employee's account under the plan will cease. Therefore, an active
employee is at risk that if he/she should become disabled and
contributions to the plan are not made, the value of his/her plan
account at the commencement of retirement will be substantially
less than it would be if he/she had not become disabled. The
reduction in the value of the employee's account will produce a
direct loss of retirement income to the employee. If the plan
allows benefits to be paid at disability, the available benefits
are based on the accumulations in the account to date, and
immediate payment of benefits from the account increase the
likelihood that the account will be depleted before retirement age,
further exaggerating the problem. Since the introduction of 401(k)
plans, many employers have entirely, or significantly, shifted the
focus of their retirement benefits from defined benefit plans to
defined contribution plans, often with a 401(k) feature, making
this disability risk a reality for millions of employees.
[0013] The potential loss of retirement account values at age 65
(usually considered to be the "normal retirement age") assuming
disability occurs at certain ages that last for certain periods of
time can be illustrated as follows:
Quantifying the Exposure
[0014] The diminution in inflation adjusted retirement income for
every $1000 of annual employer pre-tax or employer matching
contribution: TABLE-US-00001 If disability And continues to age:
occurs at age: 35 45 55 65 25 $52,500 $88,071 $112,071 $128,357 35
$35,357 $59,357 $75,642 45 $24,000 $39,428 55 $16,071 The chart
expresses the individual's loss in inflation adjusted income
attributable to the assumed $1000 of annual contribution that would
have been made had the disablement not occurred.
Assumptions: [0015] 1. 4% real rate of return (that is, inflation
adjusted). [0016] 2. Plan withdrawals over 15 years starting at age
65. [0017] 3. No salary scale. (That is, it was assumed that this
individual's compensation would not have increased during the
period he/she was disabled).
[0018] In the foregoing chart, it was assumed that the individual's
compensation would have remained the same during the period of
disability. However, if it is assumed that the individual's
compensation would have increased by a certain percentage (e.g., a
commonly used "salary scale" such as 5% per year), the losses would
be proportionately greater.
"Outside the Plan" Arrangements
[0019] Until the introduction of the invention, employers did not
think it was possible to address this risk inside the 401(k) and
other retirement plans by including disability insurance as a
feature of the plan. Even though retirement plans may include
"incidental health and welfare" benefits, there was no known way to
structure the insurance without complicating the
"non-discrimination" requirements that apply to all "benefits,
rights or features" for plans subject to IRS Section 410(b)
testing. Therefore, some employers have attempted to deal with this
risk on the part of their employees by using various funding
arrangements outside of the retirement plan. Each outside the plan
arrangement presents significant problems.
Arrangement One--Increase the Group LTD Benefits
[0020] Some employers have increased the benefits payable under
their group long-term disability (LTD) contract, or their long-term
disability program, to cover the potential loss. For example, an
employee who elects a 6% deferral and receives a 4% match to the
401(k) plan, might receive an additional 10% of pay benefit under
the regular, or a supplemental, group LTD policy. There are three
main problems with this approach. [0021] Problem One--The insurance
may not be "linked" to employee deferrals. Tax policy requires that
no other benefits may be contingent upon an employee's deferral
election under a 401(k) plan. If the employer links the amount of
coverage under a group LTD policy directly or indirectly to the
level of employee deferrals and/or employer matching contributions
under a 401(k) plan, contributions to the plan will cease to be
viewed as "elective deferral contributions" under the federal tax
laws. And, since highly compensated employees and non-highly
compensated employees elect deferrals at differing percentages of
compensation, without the special tests applicable to deferrals,
these contributions would not be able to pass the
non-discrimination requirements. Alternatively, for the employer to
set an arbitrary amount of insurance based on average contributions
would result in some employees having their account funded more
heavily if they become disabled, and other employees having their
account under-funded in the event of disability. [0022] Problem
Two--The employee may be "over-insured." Actuaries at most
insurance companies are of the view that increasing the cash
benefit payable during a disability will have an adverse impact on
the rate at which some disabled individuals respond to
rehabilitation. This is especially true if the benefit is provided
on a tax-free basis, which is the design under many employers'
group LTD programs. This risk of over-insurance would require a
substantial, disproportionately large increase in the risk charge
that must be imposed as part of the premium for the group LTD
policy. Similarly, this over-insurance could create a substantial
increase in benefit payments in a self-insured LTD program. [0023]
Problem Three--The employee may not save the benefit for
retirement. If the employee spends the additional benefit before
his/her retirement years, the employer's objective will not have
been achieved and the employee still has a significant risk of loss
at retirement.
Arrangement Two--Continue Employer Contributions to the Plan
[0024] Some employers have attempted to deal with the employee's
loss of contributions during a long-term disability by continuing
to make contributions to the plan on behalf of the employee during
the period of disability equal to the pre-disability level of
contributions. There are three main problems with this approach.
[0025] Problem One--Difficulty with IRC Section 415(c). Certain
tests are prescribed under IRC Section 415(c) that determine the
maximum annual additions allowed to the plan in a plan year. This
generally limits contributions to a defined contribution plan to
25% of the employee's taxable compensation paid by the employer.
Since a disabled individual is receiving no compensation directly
from the employer, the contribution limit becomes zero (25%
multiplied by $0 compensation). A special provision of the tax laws
permits the limit to be applied by assuming that a disabled
employee's compensation continues during a period of disability at
the same level that it was prior to the commencement of disability.
However, the rule applies only if the participant is disabled under
a very restrictive "any occupation" definition of disability. If an
employer wishes to use a less restrictive "own occupation"
definition of disability for the first two to five years following
the commencement of disability (as most employers would desire),
the special rule provides no relief for the tests prescribed under
IRC Section 415. [0026] Problem Two--Difficulty with
Non-Discrimination Tests. Contributions that are made by the
employer on behalf of disabled employees who are "highly
compensated employees" ("HCE" as defined by tax laws) may have
difficulty passing non-discrimination tests. Contributions that are
made by, employers on behalf of disabled employees under this
approach may not be tested as matching contributions under 401(m)
after the first 12 months. IRC Section 401(k) and 401(m) describe
the parameters for allowing higher levels of deferrals and matching
contributions to be made (on the average) by, or for, HCEs than are
made (on the average) by, or for, non-HCEs. Since HCEs almost
always make larger percentage of pay contributions than non-HCEs,
if the employer continues the same level of contributions that it
was making for the disabled individual prior to the disability and
these tests no longer apply, the contributions would almost
certainly be considered discriminatory. [0027] Problem Three--The
Benefit is Not Insured. An employer who decides to continue
contributions during a long-term disability could also have a
change of heart. The employer could choose to unilaterally cut back
the continuing contribution--even with respect to persons who are
already disabled. And the disabled individual is at risk that the
employer will go bankrupt. Even if the employer has insured its
risk, the benefits payable after bankruptcy would be retained by
the estate of the bankrupt employer and would benefit all of the
employer's general creditors (including the employees) on a
pro-rata basis.
Arrangement Three--Continue Employee Contributions from LTD
Benefits
[0028] Some employers permit a disabled employee to make
contributions to the 401(k) plan out of the benefit he/she is
receiving from the group LTD plan. There are three main problems
with this approach. [0029] Problem One--The LTD Benefit Must Be
Taxable to the Employee. This approach avoids the IRC Section 415
and non-discrimination problems noted as Problem One and Two above
only if the group LTD benefit is taxable to the employee. A number
of employers have structured their group LTD benefit in such a way
that the benefit under the group LTD policy is (or, at the election
of the employee, can be) tax free. Employees would be giving up a
significant tax advantage and a significant amount of disability
income in order to be able to contribute a portion of the benefit
to the 401(k) plan. [0030] Problem Two--The 401(k) Plan and LTD
Plan Must Cover Non-HCEs Equally. This approach is likely to avoid
a discrimination problem with regard to availability only if most
of the non-HCEs participating in the 401(k) plan are also
participants in an LTD program that provides the same (or higher)
percent of pay benefits than are provided to most of the HCEs. The
minimum coverage standards of ERISA applicable to the 401(k) plan
require coverage for many employees who work part-time (i.e., at
least 1000 hours per year). These ERISA standards do not apply to
the group LTD program and many employers do not provide LTD
coverage to part-time employees. If a sufficient proportion of
non-HCEs who are participants in the 401(k) plan are not
participants in the LTD program, the availability of disability
coverage under the 401(k) plan may not pass non-discrimination
tests. [0031] Problem Three--An HCE's Loss Cannot be Fully Covered.
Because of the application of the 401(k) and 401(m)
non-discrimination tests with regard to average contributions for
HCEs and non-HCEs, an HCE may not be able to replace his/her entire
pre-disability contribution. For example, consider an HCE who was
contributing 6% of pay to the 401(k) plan, becomes disabled, and
receives a 60% of pay LTD benefit. In order to continue his/her old
contribution amount, he/she would need to contribute 10% of the LTD
benefit. Such an increase in the deferral percentage for disabled
HCEs would no doubt increase the average percentage for the HCE
group and may result in failure of the 401(k) and/or (m) tests.
SUMMARY OF THE INVENTION
[0032] The method and system of the present invention are adapted
to overcome the above-noted shortcomings and to fulfill the stated
needs. The essence of one aspect of the invention is a method for
making substitute continuing periodic payments into an investment
account normally paid from a specific source, during a period of
nonpayment from the specific source, wherein the nonpayment is due
to a particular condition. This method comprises the steps of:
purchasing, with funds of an investment account an insurance policy
to make, upon occurrence of a particular condition causing a period
of nonpayment to the investment account, substitute payments to the
investment account in amounts approximately equal to those paid
from a specific source before the period of nonpayment; and,
paying, upon occurrence of the particular condition, benefits under
the insurance policy into the investment account. This inventive
method is applied effectively to retirement accounts, and
especially to defined contribution plan accounts, to prevent loss
of accumulations during an employee's disability.
[0033] The inventive system serves similar purposes, and comprises
the following elements: an insurance policy adapted to make, upon
occurrence of a particular condition causing a period of
noncontribution to a potentially-eligible employee's retirement
plan account, substitute contributions to the plan account in
amounts approximately equal to those made by the
potentially-eligible employee and/or by the potentially-eligible
employee's employer before a period of noncontribution; means for
collecting and storing potentially-eligible employee indicative
data; means for determining an employee's potential eligibility to
be a member of a group insured under the insurance policy; means
for calculating periodic premiums for each potentially-eligible
employee for appropriate coverage under the insurance policy; means
for accounting premiums paid for the insurance policy; means for
accounting benefits paid under said insurance policy; and, means
for deducting calculated premium amounts from plan assets.
Invention Effectively Replaces Lost Contributions
[0034] The effectiveness of the invention in replacing lost
contributions can be illustrated by examining the account values of
four equally contributing plan participants at four different ages
(35, 45, 55, 65). For each of the four individuals, final account
value will be determined by one of these four situations:
[0035] a) He/she does not have the invention and does not become
disabled;
[0036] b) He/she has the invention and does not become
disabled;
[0037] c) He/she does not have the invention and becomes
disabled;
[0038] d) He/she has the invention and becomes disabled.
[0039] For sake of simplicity, it will be assumed that disability
for participants in situations c) and d) occurs at the beginning of
the year in which they achieve age 40. It will also be assumed that
all four participants are contributing $4500 per year to the plan
and that all began contributing at the beginning of the year in
which they achieve age 35. All participants make 24 payroll
deposits to the plan each year and earn a 9% annual investment
return. The premium for the insurance is $45 per year per
participant and it is paid out of each participant's annual
contributions beginning at age 36. Insurance benefits for the
participant in situation d) are paid to the plan monthly after a
365 elimination period. Premium is waived at the point in which
benefit payments begin. TABLE-US-00002 Never Disabled Disabled at
Age 40 Age Not Insured Insured Not Insured Insured 35 $4,699.51
$4,699.51 $4,699.51 $4,699.51 45 $82,524.70 $81,779.49 $47,168.75
$82,079.59 50 $266,756.24 $264,255.84 $111,665.58 $265,572.31 65
$702,929.61 $696,243.73 $264,353.03 $699,966.33
[0040] The financial loss to the individuals who become disabled is
significant and the effect of the invention in mitigating this loss
is apparent.
Invention Solves the "Anti-Linking" Problem
[0041] Tax law states that no other employee benefit program may
have benefits based on the employee's deferral election under the
401(k) plan. To do so would disqualify the "elective" nature of
these contributions. By structuring the insurance as a feature of
the plan, the amount of insurance coverage available to each
insured may be exactly equal to his/her level of elective
contributions in the 401(k) plan. This allows each person's exact
loss to be insured, and it is consistent with the nature of a
401(k) plan that allows each employee to invest according to
his/her individual retirement goals.
Invention Solves the "Over Insurance" Problem
[0042] By paying disability benefits to the plan for the benefit of
the disabled employee, the concern of "over-insurance" is
mitigated. Because the benefit is not paid as cash to the disabled
employee, there will not be a significant impact on the employee's
motivation toward rehabilitation. The insurer may require that the
plan propose additional withdrawal restrictions on plan assets that
are the result of disability benefits, such as excluding these
assets from hardship withdrawals and loans, or restricting
distribution of these assets during the period of disability.
Further, the insurance contract could specify that disability
benefits will cease if insurance proceeds are withdrawn from the
plan.
Invention Solves the "Saved for Retirement" Problem
[0043] The safeguards that may apply to the over-insurance problem
as described above will also solve another problem presented by the
"outside the plan" arrangements. Under an arrangement where the
disabled employee has control of the disability benefits, there is
a risk that the benefits may not be saved for retirement as
intended. By depositing the benefits to the plan and implementing
the restrictions described above, the employer is assured that the
benefits will be treated as plan assets, with even more stringent
restrictions during the period of disability.
Invention Solves the IRC Section 415(c) Problem
[0044] IRC Section 415(c) limits the maximum "annual additions" to
most retirement plans for an individual to 25% of covered
compensation. Ordinarily, since the disabled employee's covered
compensation is zero, any contribution to the plan would be in
excess of these limits. The invention solves this problem by
treating the insurance as an investment of the plan so that
benefits paid to the plan may be considered investment returns
rather than contributions. Investment returns are not included as
"annual additions" under 415(c).
Invention Solves the IRC Section 401(k) and 401(m) Testing
Problems
[0045] Both of the problems discussed earlier with regard to
continuing contributions into the 401(k) plan for disabled HCEs are
the result of testing those contributions under the 401(k) and (m)
rules that describe the parameters for contributions on behalf of
HCEs. Once again, the invention avoids this problem by treating the
insurance as an investment of the plan so that benefits paid to the
plan may be considered investment returns rather than
contributions. If benefits paid on behalf of a disabled HCE are
investment returns rather than contributions, they are not subject
to the non-discrimination requirements or the tests prescribed in
IRC Section 401(k)/(m).
[0046] In addition, the invention provides a way to establish that
the coverage amount is non-discriminatory because it is linked to
contributions that must be demonstrated as non-discriminatory under
401(k)/(m). In addition, contributions made by the employer or
employee to pay the premium would be included in these tests as
described below.
Invention Solves the Complications to the Regular LTD Plan
[0047] Under the invention, the retirement plan disability
insurance is provided by a free standing insurance contract that
does not complicate the regular group LTD plan. The employer is
free to structure the regular LTD program to exclude part-time
employees (even if they are included in the retirement plan) and
provide a tax-free benefit (if desired by the employer and/or
employee) without regard to the retirement plan. However, since the
retirement plan disability insurance is also provided by a group
LTD contract, experience under this contract may influence
experience ratings under the regular LTD contract. This result is
unlikely since the elimination period under this contract is
probably longer than the elimination period under the regular LTD
contract.
Invention Solves the "Benefit Guarantee" Problem
[0048] Under the invention, the insurance benefits are provided
through the purchase of a contract from an insurance company, and
therefore, are secured by the financial backing of the insurer.
Continuation of benefits is set by the terms of the contract, not
upon the employer's financial solvency or good will.
Invention Facilitates Compliance Testing
[0049] The following tests must be applied to determine that the
insurance offered within the plan meets the non-discrimination
requirements of a retirement plan.
[0050] 1. IRC Section 415(c) Testing. If the premium for the
insurance is being paid from contributions, whether from a special
"premium designated" employer contribution or from the regular
contributions, the premium for insurance coverage for the current
policy year is included in the prior plan year's "annual additions"
of IRC Section 415(c). The 25% of covered compensation maximum
would include any premiums paid for the following year. As
discussed earlier, disability benefits deposited to the trust are
not included as annual additions.
[0051] 2. IRC Section 401(k) and (m) Testing. If the premium for
the insurance is being paid from contributions, whether from a
special "premium designated" employer contribution or from the
regular contributions, the premiums for coverage in force the
current policy year are included in the prior plan year's
contributions under any applicable non-discrimination tests of IRC
Section 401(k) and (m). If a special "premium designated" employer
contribution is allocated differently the regular employer matching
contribution or if there is no regular employer matching
contribution, the premium contribution would need to be tested
separately under IRC Section 401(m) for the prior plan year. This
is probable because the premium contribution would most likely be
made for employees still employed on the last day of the prior plan
year and most regular matching contributions are made for all
employees who elect deferrals during the year.
[0052] 3. IRC Section 410(b) Testing. The "current availability"
portion of the benefits, rights, and features test applicable to
the disability insurance coverage as a benefit of the plan is
passed by applying the 410(b) classification test to the group of
participants for whom coverage entitlement is earned in the prior
plan year. The classification test is applied without average
benefit testing, although the lower threshold set forth in the
average benefit test may be used for the classification test. In
addition, the benefits, rights and features test applicable to an
employer "premium contribution" (whether matching or non-matching)
should the employer choose to make such a contribution is passed by
applying the same 410(b) classification test to those receiving the
contribution for the prior plan year.
[0053] The amount of insurance coverage provided to eligible
employees is demonstrated to be non-discriminatory because it is
linked to contributions which are already demonstrated to be
non-discriminatory by the 401(k) and (m) tests.
[0054] 4. Incidental Benefit Limit. The incidental benefit test
limiting premium for "incidental health and welfare benefits" to
25% of the employee's annual contribution is applied assuming that
the entire premium contribution is deemed as being made at the end
of the prior plan year, even if the contribution is accrued for the
prior plan year and deposited to the trust the following plan year.
This is important for employers making a special premium
contribution for the prior plan year at the beginning of the
current policy year, even though the employer may choose to deposit
the balance of the contribution to the trust at a later time, as
allowed by tax laws. Premium for the disability insurance is
commingled with applicable premium for life insurance held by the
plan.
Invention Can be Applied to Other Defined Contribution Plans
[0055] Defined contribution plans that include non-401(k) employee
deferrals or employee contributions, such as government sponsored
deferred compensation arrangements under IRC Section 457 or plans
sponsored by churches under IRC Section 403(b)(9) may also use the
invention to insure contributions in the event of a participant's
disability.
[0056] Defined contribution plans under IRC Section 401(a) that
include employer contributions based on a percentage of
compensation for each eligible participant rather than on the
election of the participant (such as profit sharing or money
purchase pension contributions) may also employ the
methodology.
[0057] Thus, it is an object of the present invention to provide a
method and system for preventing loss of contributions to a
retirement plan during an employee's disability.
[0058] It is a further object of the present invention to provide a
method and system for insuring against loss of retirement benefits
during disability, without violating tax law restrictions against
linking other benefit programs to an employee's deferral
election.
[0059] Yet another object of this invention is to provide insurance
against loss of retirement contributions during disability which
does not result in a significant impact on an employee's motivation
toward rehabilitation.
[0060] Yet a further object of the present invention is to provide
insurance against loss of retirement contributions during
disability through a vehicle which minimizes the risk that the
benefits may not be saved for retirement, as intended.
[0061] Still a further object of the present invention is to
provide means for insuring against loss of retirement benefits
during disability, wherein benefits paid to the plan may be
considered investment returns, rather than contributions, thus
complying with maximum annual addition limitations under IRC
Section 415(c).
[0062] Another object of the present invention is to provide
insurance against loss of retirement contributions during
disability which is not subject to the non-discrimination
requirements or the tests prescribed in IRC Section 401(k)/(m).
[0063] And it is also an object of the present invention to provide
a method and system for insuring against loss of retirement
benefits during disability which does not complicate an employer's
regular group LTD plan.
[0064] Still further objects of the inventive system and method
disclosed herein will be apparent from the drawing figures and
following detailed description thereof.
BRIEF DESCRIPTION OF THE DRAWINGS
[0065] FIG. 1 is a procedural flow chart illustrating how the
record keeping software and disability application work together to
share information.
[0066] FIG. 2 is a flow chart showing the timing of the data
exchange between the record keeping system and the disability
software.
[0067] FIG. 3 is a flow chart showing the logical steps carried out
by the disability application to determine eligibility, to
calculate premiums and to export the transaction information to the
record keeping system.
[0068] FIG. 4 is a step-wise textual flow chart setting forth the
same procedure as is illustrated by FIG. 3.
DESCRIPTION OF THE PREFERRED EMBODIMENT
[0069] The invention includes: 1) the identification of two basic
principles that solve the problems inherent in any of the other
arrangements; and 2) a methodology for applying these two
principles to the administration of the retirement plan.
Principle 1: Insurance is Included as a Provision of the Retirement
Plan
[0070] Disability insurance covering plan contributions must be
included as a plan feature in the retirement plan document and the
conditions for receiving disability coverage must be set forth in
both the plan document and the Summary Plan Description (SPD).
Because it is a feature of the plan, the policy is held by the plan
as an investment of the trust, plan assets are used to pay
premiums, and benefits payable under the policy are paid to the
plan rather than the disabled individual.
Principle 2: Insurance for the Current Year Depends on the Prior
Plan Year
[0071] If the insurance policy is a "feature" of the retirement
plan as described under the first principle, it becomes subject to
all of the compliance requirements of the plan. Therefore, IRS
Section 410(b) that describes non-discrimination for all "benefits,
rights, and features" of the plan would apply. Conservative
practice dictates that the insurance must be non-discriminatory
with regard to availability and with regard to the amount of
coverage. The invention provides a way to define the insurance
availability and coverage amount in a manner that may be
demonstrated as non-discriminatory under Section 410(b). Without
this conclusive testing being applied before the payment of
premium, or worse yet, the payment of benefits, the insurance could
be found to be discriminatory in operation, with serious
consequences to the plan.
[0072] The second principle of the invention is that the insurance
is a feature of the retirement plan for the plan year before the
policy year for which the coverage is in force. In other words, the
entitlement to the coverage is earned by participants in the
retirement plan the prior year and the plan feature providing the
disability insurance coverage applies to the prior plan year, but
the actual insurance is in force for disabilities occurring the
next policy year. The results of this prior plan year/current
policy year relationship are: [0073] 1. The amount of coverage for
the current policy year is equal to insured plan contributions for
the prior plan year. [0074] 2. The eligible group for the current
policy year is determined by plan participation in the prior plan
year. [0075] 3. Premiums for the current policy year are paid from
the prior plan year's contributions and/or earnings. [0076] 4. The
insurance is tested under the tax rules for non-discrimination in
the prior plan year.
[0077] This allows the amount of insurance coverage for each
participant to be related both to a fixed compensation amount (to
satisfy insurance company underwriting requirements and plan
administration procedures) and to contributions (to satisfy
non-discrimination rules).
EXAMPLE
[0078] An employer who has a 401(k) plan with a calendar plan year
amends the plan on Nov. 30, 1998 to include disability insurance
covering employee deferrals and the employer matching contributions
for 1998. In addition, the employer chooses to make a special
matching contribution to the plan to pay the premium. Therefore,
the insureds are employees who had employee deferrals and employer
matching contributions made to the 401(k) plan on their behalf for
the 1998 plan year. The amount of coverage is equal to the amount
of employee deferral and employer matching contributions for 1998
(excluding the special "premium" match), and the premium
contribution is deposited to the plan as a 1998 contribution. The
insurance is tested for non-discrimination with regard to the
"benefits, rights, and features" test for 1998, and the special
matching contribution is tested under IRC Section 401(m) for 1998.
The effective date of the insurance would be Jan. 1, 1999 and the
policy would provide insurance for disabilities occurring in
1999.
ALTERNATIVE EMBODIMENTS OF THE INVENTION
[0079] Several existing software, whether manufactured by a
software company or created by the user for the purpose of record
keeping a Defined Contribution Plan, track assets in the trust on a
participant by participant level and store the data required under
applicable tax laws. All assets in the trust are accounted for via
a matrix that tracks "sources," or types of money, that are
deposited into the trust (i.e., employee pre-tax deferral
contributions, employer matching contributions, employer profit
sharing contributions, rollover contributions, etc.) and "funds,"
or investment options, within the trust (securities or investments
in which trust assets are invested). Contributions, investment
earnings, fees, loans, withdrawals, and other account activity are
identified with both the correct source and fund within each
participant's account.
[0080] The preferred embodiment of the invention would be a
separate computerized software program, or "disability
application," to collect the required data from the record keeping
system to calculate premiums for each eligible participant and
create the transaction instruction for the record keeping system to
initiate the payment of the premium from each participant's
account. The disability application provides current coverage and
premium data for both the record keeping system and the insurer and
archives historical participation data in the disability policy for
use by the insurer to monitor coverage in force and adjudicate
future disability claims. The disability application also provides
data on the disability policy for the record keeping system to
include in preparing the necessary compliance tests for the
plan.
[0081] Another satisfactory method of applying the invention is to
incorporate the processes and calculations of the methodology
within the record keeping software itself and avoid the need for
interface between the two systems. In either approach, the
computerized processes covered by the invention remain the
same.
Insurance Contract Provisions
[0082] Applying the methodology to the underlying group long-term
disability insurance policy requires certain unique provisions in
the insurance contract. The insurance contract must contain the
following provisions: [0083] 1. The policyholder is the trustee of
the insured plan. [0084] 2. The policy year of the insurance
contract is matched to the plan year of the plan (i.e. January
1-December 31, etc). [0085] 3. The insured for the policy year are
employees who had an insured contribution made to the plan on their
behalf for the prior plan year. [0086] 4. The amount of monthly
benefit for each insured is equal to 1/12th of the amount of
insured contributions for the prior plan year. [0087] 5. The
premium for the current year is paid by the trustee from the prior
year's contributions or investment earnings. [0088] 6. The
elimination period between the occurrence of the disability and the
commencement of benefits is at least 365 days. [0089] 7. The policy
provides for benefits to be paid to the plan in the event of an
insured's long-term disability. [0090] 8. Disability benefits will
cease if they are withdrawn from the plan during the disability
period. Methodology of the Invention
[0091] The following functions, processes, and calculations are
necessary to apply the basic principles of the invention to plan
administration processes.
I. Underwriting/Renewal Process
[0092] Process 1--Collect "employee indicative data" from record
keeping system the appropriate participant-level data fields
required by the insurer to provide initial or renewal premium
rates: [0093] Participant/record identifier (i.e., SSN) [0094]
Gender [0095] Occupation Code [0096] Date of Birth [0097] Date of
Hire [0098] YTD compensation (W-2 pay from plan entry date, [ok if
capped at $160,000]) [0099] YTD contributions (by source for
insured sources only)
[0100] This information is provided annually based on the YTD
information for the current plan year for the insurer to provide
rates for the following policy year. If the YTD data to be provided
includes less than six plan months of data, the current year
information will not be sufficient. In those cases, the complete
annual information from the plan year prior to the year in which
the file is being prepared will be used. [0101] Process 2--Prepare
file with renewal data and send to the insurer. II. Annual
Eligibility Determination [0102] Process 1--Collect data from
record keeping system necessary to identify employee participants
meeting the definition of eligibility for the new policy year under
the insurance contract and to determine coverage in force based on
the prior plan year's insured contributions, then assign or
maintain the existing Effective Date of insurance for each.
[0103] Requirements to be in Eligibility Group: [0104] 1.
Contribution made for an Insured Source in the Plan Year prior to
the Policy Year; and [0105] 2. No Date of Termination prior to the
last day of the prior Plan Year. [0106] Process 2--Calculate annual
and monthly premium for each eligible participant for appropriate
coverage in force using the rate provided by the insurer and send
file with annual amount back to record keeping system. [0107]
Process 3--Expand record keeping matrix to include "Beneficiary
Payments" as a source of money and "Insurance Premium Fund" as an
investment fund offered by the Plan. [0108] Process 4--Transfer
assets from the other funds to the Insurance Premium Fund in the
amount necessary to pay the full year's premium on the first day of
the new policy year for all eligible participants. Assets to pay
the premium may be taken from any of the prior year's contribution
sources (employee deferral, employer match, etc.), from the prior
year's investment earnings, or a combination of both. As an
alternative, the employer may make a special contribution to the
plan to cover the premium. This contribution would be deposited
directly to the Insurance Premium Fund as a new money source for
the prior year. III. Monthly Premium Transactions [0109] Process
1--At each premium due date, collect updated participant
information (specifically, date of termination and beneficiary
payment status) from the record keeping system to determine
eligible participants for whom premiums are due. Premiums are paid
for all identified in the annual Eligibility Group, except those
with a Date of Termination on or before the last day of the prior
month, and those who received a Disability Benefit from this policy
in the prior month. [0110] Process 2--Prepare a transaction file
for the record keeping system to deduct appropriate premium amounts
from participant accounts and instruct the trustee to forward
payment to the insurer. [0111] Process 3--Produce a report for the
insurer of total covered lives, total insurance in force, and total
premiums for the premium due date. IV. Retroactive Premium
Adjustments [0112] Process 1--If at any time during the policy year
the amounts of contributions for the prior plan year are adjusted
due to errors in accounting, or adjustments are required to pass
compliance tests (i.e., recharacterization of contributions,
refunds of contributions, employer corrective contributions are
made for the plan year), the corrected contribution amounts are
collected from the record keeping system and sent to the disability
system and a corrected coverage in force is determined for affected
participants. [0113] Process 2--Recalculate the annual premium
amount for the entire policy year using the corrected coverage in
force. If premiums to date have been overpaid for affected
individuals, the overpayment is credited against future premiums
due for the individual. If premiums to date have been underpaid for
affected individuals, the underpayment is included in future
premiums due for the individual. If the participant has already
terminated, no adjustment is made. V. Beneficiary Payment Deposits
[0114] Process 1--Deposit beneficiary payments received by the
trust from the insurer to the Beneficiary Payment source of money
in the record keeping matrix for the disabled participant and flag
such payments as withdrawal restricted while benefits are being
paid to the trust on behalf of the disabled participant. [0115]
Process 2--Identify and notify the insurer of any disabled
participant taking a withdrawal of beneficiary payments made to the
plan while in beneficiary payment status. VI. Annual
Reporting/Archiving [0116] Process 1--Prepare a report for each
employee participant of the amount of coverage in force and the
amount of premium paid during the current policy year. [0117]
Process 2--Produce reports for the insurer of total covered lives,
total insurance in force, and total premiums paid for the policy
year. [0118] Process 3--Archive the annual participation data,
including specific participants for the policy year, effective
dates of coverage, amount of coverage in force, and total premiums
paid by participant and maintain policy records for inspection by
the insurer for a period of seven years. [0119] Process 4--Verify
effective date, premiums paid, and coverage in force for the
insurer in the event of a disability claim made by an insured. VII.
Annual Compliance Testing/Reporting [0120] Process 1--Provide data
to include premiums paid from contributions for coverage in force
the current policy year in applicable testing for the prior plan
year under 415(c). Adjust contributions and premiums as necessary
to pass tests. Exclude amounts deposited during the prior plan year
as beneficiary payments. [0121] Process 2--Provide data to include
premiums paid from contributions for coverage in force the current
policy year under applicable testing for 401(k) and/or (m) for the
prior plan year. If the employer made a matching premium
contribution for the prior plan year for the exact group of
participants receiving the regular matching contribution, include
the matching premium contribution in the applicable 401(k) and/or
(m) tests. Exclude amounts deposited during the prior plan year as
beneficiary payments. [0122] Process 3--If the employer made a
matching premium contribution for the prior plan year and the
regular matching contribution does not have a last day of plan year
requirement, the application must provide data for a special 401(k)
and/or (m) test on the matching premium contribution for the prior
plan year. [0123] Process 4--Provide data for a 410(b)
classification test using the lower threshold of the average
benefit test on the group of participants who earned entitlement to
the insurance in the prior plan year (generally will include all
participants contributing during the year and who were still
employed on the last day of the plan year). [0124] Process
5--Provide data for a 410(b) classification test if any employer
premium contribution was made for the prior plan year, using only
those who received the contribution for the prior plan year (may
include all participants still employed on the last day of the plan
year or may include only participants contributing during the year
and still employed on the last day of the plan year). [0125]
Process 6--Provide data for the incidental benefit test limiting
insurance premiums to 25% of annual contributions using total
annual premium for each individual (must combine with any
applicable life insurance premiums paid by the plan). [0126]
Process 7--Provide data required for preparation of tax reporting
forms 1099 or W-2 in the case that premiums paid for the insurance
are taxable, or that beneficiary payments withdrawn from the plan
by the employee participant are taxable. Data Sources
[0127] The disability application will receive data from: [0128] 1.
An automatic import from the record keeping system. [0129] 2.
Manual file load from employer's HRIS records. [0130] 3. Manual
input of insurance rates from insurer, disability payment status,
disability payment amount, etc. Database Elements
[0131] The disability application will require new database
elements within the record keeping system at the System Level, the
Plan Level, and the Participant Level.
[0132] System Level Information
[0133] Disability premium transaction code
[0134] Disability benefit payment transaction code
[0135] Plan Level Information
[0136] Additional fund--Disability Premiums
[0137] Additional source of money--Disability Benefits
[0138] Source flag for all sources--Contribution Eligible for
Disability Insurance
[0139] Flag for Disability Source--Exclude Source from Compliance
testing
[0140] Annual Effective Date
[0141] Current Effective Date
[0142] Disability Premium Rate
[0143] Coverage Percentage--percent of Eligible Contribution to be
insured
[0144] Voluntary--Y or N whether Disability Insurance is
elective
[0145] Premium Source Flag--which Source Premiums are paid from
[0146] Participant Level Information
[0147] (* Indicates data elements already held within record
keeping system. All other data elements are new.)
[0148] *Social Security Number
[0149] *Name
[0150] *Address
[0151] *City State Zip
[0152] *Date of Birth
[0153] *Date of Hire/Rehire
[0154] *Date of Termination
[0155] Sex
[0156] Occupation Code
[0157] Election to Participate Flag
[0158] Coverage Effective Date
[0159] Disability Date
[0160] Disability Payment Start Date
[0161] Disability Benefit Status
[0162] Annual Coverage Amounts (by Source)
[0163] Annual Premium Amounts (by Source)
[0164] Life-to-Date Coverage Amounts (By Source)
Note: Year-To-Date and Life-To-Date premium and payment information
should be accessible via transaction detail reporting within the
record keeping system.
Menu Structure
[0165] The menu structure will require items on both the record
keeping side and the disability application side. They are as
follows:
Record Keeping System Menu Elements
[0166] 1. Export Annual Disability File
[0167] 2. Import Premium File
[0168] 3. Process Annual Premium Transfers
[0169] 4. Process Monthly Premiums
[0170] 5. Process Monthly Disability Payments
Disability Application Menu Elements
[0171] 1. Import Annual Disability File
[0172] 2. Calculate Annual Coverage/Premiums
[0173] 3. Export Premium File
[0174] 4. Year-End Archive
[0175] 5. Reporting
Flowcharts and Diagrams
FIG. 1--Disability Compensation Plan Procedural Flowchart
[0176] This figure details how the record keeping software and
disability application work together to share information. The
participant level data necessary for processing the insurance
initially resides within the record keeping system. The disability
application would provide the necessary administration functions
and send the transaction information back to the record keeping
system. This figure illustrates the functions provided by the
disability software, which include calculation of the premium
amounts, creating transaction records for the record keeping
system, and providing data archive.
FIG. 2--Disability Compensation Plan Possible Monthly Workflow
[0177] This figure illustrates the timing of the data exchange
between the record keeping system and the disability software in
order to administer the insurance.
FIG. 3--Disability Compensation Plan Premium Calculation
Procedures
[0178] FIG. 3 illustrates the logical procedures the disability
application undertakes in order to determine eligibility for
insurance, calculate the premiums and return the transaction
information to the record keeping system.
FIG. 4--Technical Description of Disability Compensation Plan
Processes
[0179] FIG. 4 illustrates the same procedure for determining
eligibility, calculating premiums as FIG. 3 but in the form of
text.
Variations of the Methodology
Premiums Paid as Plan Expense
[0180] Defined Contribution Plans are allowed under regulations
provided by the IRS and the Department of Labor (DOL) to pay
certain plan expenses from plan assets. Plan expenses must be
related directly to the administration of the plan itself.
Generally, such expenses are netted out of investment earnings and
are not itemized on the participant statements. Plan expenses in
total are included on the annual reporting Form 5500 and are given
to participants in the Summary Annual Report.
[0181] If approved by the IRS and the DOL, disability insurance as
an inherent feature of the plan could be charged against earnings
as a plan expense. The principles of holding the insurance inside
the plan and using the prior plan year as the basis for coverage in
the insurance would remain unchanged. This variation in the
methodology would be as follows: [0182] First--the file described
under "Process I, Underwriting/Renewals Process" would be prepared
for the insurer. Additional data required by the insurer would
include the employer's current and projected turnover ratio. The
insurer would calculate the premium rate and establish the total
annual premium for the plan by projecting total plan year
contributions, terminations through the remainder of the year and
terminations for the next year, and possible adjustments due to
discrimination tests, etc. The annual premium for the plan is
fixed, but the number of individuals and total amount of coverage
may change during the plan year due to terminations, testing, etc.
[0183] Second--before the end of the prior plan year, the trustee
instructs the record keeper to allocate the total annual premium as
an "expense" against earnings for the prior plan year. Record
keeping software allows the user to build in system parameters on
how the expense should be allocated. For this expense, the
parameters would be set to allocate the expense only to
participants who are not terminated, who are not receiving
disability benefits, and who are under age 65; then the allocation
would be weighted according to contributions. The total premium
would be subtracted from the plan's final quarter earnings and
moved into a segregated account. The total annual premium would be
sent to the insurer after the effective date of coverage. This step
would replace processes II through IV. [0184] Third--beneficiary
payments for a participant receiving a disability benefit would be
handled exactly as "Process V--Beneficiary Payment Deposits."
[0185] Fourth--"Process VI--Annual Reporting/Archiving" would not
be necessary. If a disability claim is made by a participant, the
insurer would check with the employer to see that the eligibility
requirements under the terms of the policy have been met and to
verify the actual amount of coverage that was in force for the
individual on the date of disability. [0186] Fifth--Steps 4, 6, and
7 would be the only required processes under "Process VII--Annual
Compliance Testing/Reporting." Individual Disability Policies
[0187] The methodology described herein uses a group long-term
disability policy to provide the insurance. However, if the
insurance is to be offered on a voluntary basis, a group policy may
not be desirable and the methodology may be better applied using
individual policies for the participants in the plan who desire the
coverage. Once again, the principles of holding the insurance
inside the plan and using the prior plan year as the basis for
coverage for the insurance would remain unchanged. The premium for
individual policies would be paid annually for the entire plan year
and coverage would continue throughout the plan year, even if an
employee terminates employment. The modifications to the
methodology are as follows: [0188] First--the underwriting and
annual eligibility would be as described in Processes I and II.
[0189] Second--rather than monthly premium transactions as
explained in Process III, the system would track a "yes" or "no"
election for each participant and would pay the annual premium once
at the beginning of the year for each participant electing "yes"
(illustration included in FIG. 3). In addition, the system would
send the entire participant record to the insurer, who would keep
participant specific data for each policy. [0190] Third--Processes
IV, V, VI, and VII would be as described. Application to Other
Defined Contribution Plans Other Employee Deferrals
[0191] Defined contribution plans that include non-401(k) employee
deferrals or employee contributions, such as government sponsored
deferred compensation arrangements under IRC Section 457 or plans
sponsored by churches under IRC Section 403(b)(9) may also use the
invention to insure contributions in the event of a participant's
disability. Such plans are not subject to all of the tax
regulations and non-discrimination requirements that a 401(k) plan
must meet, however, the invention allows for these plans to provide
insurance in a manner consistent with plan administration
requirements and insurance underwriting requirements, while
assuring that insurance proceeds will be held until retirement.
[0192] Defined contribution plans sponsored by educational or
charitable organizations under IRC Section 403(b)(7) are restricted
to investing in annuities or mutual funds. Should the rules
regarding investment options for these plans be broadened, the
invention would also be useful to such plans, since they are also
subject to the non-discrimination requirements of IRC Section
415(c) and/or the Maximum Exclusion Allowance and IRC Section
401(m) (for matching contributions).
Other Employer Contributions
[0193] Defined contribution plans under IRC Section 401(a) that
include employer contributions based on a percentage of
compensation for each eligible participant rather than on the
election of the participant (such as profit sharing or money
purchase pension contributions) may also employ the methodology.
Because these employer contributions are not subject to the
anti-linking rules or 401(k)/(m) non-discrimination testing (unless
elected by the employer), not all of the presented arguments for
the necessity of the invention apply to these types of
contributions. However, employers often provide employees a defined
contribution program that involves a combination of both 401(k)
employee deferrals and employer contributions, and generally, all
contribution types are administered together as one retirement
program. Therefore, the presented methodology is the only
consistent way to offer disability insurance covering all
contribution types. To employ another methodology to the non-401(k)
or non-matching contributions would be overly confusing to the
employees.
[0194] In addition, it would be undesirable for the amount of
insurance coverage and the premium to change as a participant's
compensation changes during the plan year under any type of defined
contribution plan. Because in any qualified defined contribution
plan the insurance amount must be based on a non-discriminatory
formula, such as contributions (which must be demonstrated to be
non-discriminatory under plan rules), using the prior year as the
basis for coverage produces the best result. Such plans also have
the option of applying the methodology using a fixed percentage of
the prior year's plan compensation for each participant as the
basis for determining insurance amount rather than using the prior
year's actual contributions. All other aspects of the methodology
would apply as described.
[0195] The foregoing detailed disclosure of the inventive method
and system are considered as only illustrative of the preferred
embodiment of, and not a limitation upon the scope of, the
invention. Those skilled in the art will envision many other
possible variations of the structure disclosed herein that
nevertheless fall within the scope of the following claims.
[0196] And, alternative uses for this inventive method and system
may later be realized. Accordingly, the scope of the invention
should be determined with reference to the appended claims, and not
by the examples which have herein been given.
* * * * *