As far back as the late 1800s
businesses began recognizing that it takes more than merely wages to recruit,
motivate, retain and reward employees. In a global economy where workers can
easily take their skills to the highest bidder, companies realized that they
must provide something else - a competitive advantage – to retain worker
loyalty. Enter the Welfare Benefit Plan (WBP), as indispensable in the 21st
century as they were 150 years ago.
Congress has long
recognized the benefits of WBPs and has provided numerous incentives for
companies to establish them. The reason is simple, to the extent that the
private sector provides these benefits on a voluntary basis, there is less
burden on society as a whole. Benefits available through WBPs include sickness,
accident, health, severance, education, child care, long term care, disability,
dental, legal assistance and death benefits. A Trust is the preferred method of
funding a WBP and Congress has required both the Department of Labor and the
Internal Revenue Service to establish regulations to insure that these Trusts
actually provide the benefits promised.
Welfare Benefit
Plans have several advantages over self-funding as a means of providing valuable
benefits for employees. The ability to pre-fund and the ability to protect the
funds from creditors allow WBP’s to achieve their primary objective – to insure
that the money is available to pay the benefits when the triggering event
occurs. Recognizing that WBPs are indispensable in the operations of businesses,
the law allows a company establishing a WBP to deduct the cost of funding the
benefits as an ordinary and necessary business expense. Additionally, through
the use of a multiple employer welfare benefit plan, small to mid-size companies
can achieve reduced costs and economies of scale which result from risk shifting
and risk sharing.
Historically,
small to mid-sized companies and professional practices have had difficulty
competing with larger corporations due to limited financial resources. Large
companies have been able to out bid small companies in the hiring of top talent
by providing more competitive compensation packages, which include welfare
benefits. Small to mid-sized businesses are frequently at an unfair disadvantage
due to limited resources. A WBP can help level the playing field. Properly
structured, a WBP can be exempt from ERISA’s non-discrimination rules thus
allowing many professionals and business owners to select which employees or
employee classes will receive benefits and the level of those benefits.
Welfare benefit
plans are to be distinguished from Retirement and other Deferred Compensation
Plans. Whereas Retirement Plans provide future benefits at a time certain,
Welfare Benefit Plans provide current benefits upon the occurrence of a
contingent event. The charts below illustrate some of the distinctions between
Welfare Benefit Plans and Retirement Plans.
Welfare Benefits
- Severance Benefits
- Unemployment Benefits
- Vacation Pay
- Sickness Plan
- Accident Plan
- Hospitalization Plan
- Medical Expense Plan
- Recreational Plan
- Educational Benefits
- Death Benefits
- Child Care
|
Retirement Benefits
- Stock Bonus
- Pension
- Annuity
- Profit Sharing
- 401K
- Simple
- SEP
- ESOP
- Money Purchase
- Defined Contribution
- Defined Benefit
|
Welfare Benefits
- No Contribution Limits
- No Vesting
- Current Deduction
- Contributions/Benefits Not
Tied to Salary
- Can be Selective
- Creditor Protected
- ERISA Parts I & IV
- Divorce Protected
- Bankruptcy Protected
|
Retirement Benefits
- Contributions Limited by
Statute
- Vesting
- Current or Deferred
Deduction
- Contributions/Benefits
based on Salary
- Generally
Non-Discriminatory
- May or May Not be
Creditor Protected
- ERISA Parts I, II, III,
IV
- Not Divorce Protected
- May Not be Bankruptcy
Protected
|
Disclaimer: The material discussed
herein
is meant for general illustration or informational purposes only and is
not to be construed as investment advice. Although the information has been gathered from sources believed to
be reliable, it is not guaranteed. Please note that individual situations
can vary; therefore, the information contained herein should be relied upon only when
coordinated with individual professional advice. We are not licensed for
and therefore do not provide tax or legal advice.
About
the Author: Paul M.
League, QFP, CFP® is the Founding Principal of both League Financial & Insurance
Services (www.LeagueFinancial.com) & League Financial Services (www.LeagueFS.com),
which are privately held companies
located in Palm Desert, CA.
Paul and his companies specialize in assisting clients to
create, expand & preserve assets. Contact Information: Paul M. League, QFP, CFP®, P.O. Box
11800, Palm Desert, CA 92255-1800 · 800.482.5347 ·
Info@LeagueFinancial.com.
©Paul M. League. All Rights Reserved.
Please contact us for plan design, funding and plan compliance disclosures at:
800.482.5347
