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Nonqualified Welfare Benefit Plan (keystone benefit group)

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  • Nonqualified Welfare Benefit Plan (keystone benefit group)

    We are being offered a new investment opportunity with our large hospital system. The policy is with Keystone Benefit Group. They called it a nonqualified welfare benefit plan. It is a life insurance policy as required by the govt. As WCI stated, these things are complex so forgive me if I am not explaining everything correctly or don't provide enough information.

    Money goes in pre tax, grows tax free and comes out tax free with caveats obviously. Our hospital system is contributing 15% on all contributions to offset the ~15% expense of the policy. Minimum contribution is 30k/year pretax for atleast 3 years. After 5 years, can pull out up to 20% of the available plan balance tax free. We can choose investment options including S&P 500 indices. These are capped on %return (unclear cap) and interest does have to be paid on the policy (which they said the rate is set by the govt?) If we leave the employer before 3 years, there will obviously be costs associated with this. But no fees after 3 years.

    I am already maxing out my 403b, NG 457, wifes 401k, backdoor Roth IRAs and our HSA. I plan to stay at this job for a long time.

    I know WCI is against these sort of policies. But does it seem too good to be true? I'm not a tax expert but it seems you can just avoid paying taxes on this money (once you hit 5 years and can take out up to 20% of plan/year).

    If I wanted to save more, does this plan make more sense than a taxable account? They showed us these fancy graphs of this plan vs an after tax investment and how much more money we would make because of the tax savings alone.

    Has any one else had access to this plan via their employer? They said they have it in a few large health systems.

    Appreciate any advice. I know WCI and followers are usually against these policies but I thought I would ask. Thanks!

  • #2
    We have no clients (who I am aware of, at least) who participate in one. I don't know if it's b/c our clients skew toward much more financially informed or they are that rare. Seems silly on the face of it to opt out of a 15% match, but I really know nothing about the long-term cost/benefit.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Any documentation of this plan that you could potentially attach? To me it seems your explanation is 'off'. I find it very difficult to believe that pre-tax contributions can become after-tax income within this certain timeframe/structure. A WL structure outbound is a surrender or a loan to policy holder. The US Government likes money too much not to close this particular loophole.

      If the structure is described correctly, then I would demand what is called a 'will opinion' from the hospital system that employs you before contributing. A 'will opinion' basically makes the hospital system totally liable if the IRS finds the structure to not be in compliance with the tax law/regulations. Alternatively, this maybe a deferred compensation plan, though money goes in and come out on a pre-tax basis (and is claimable by debtors in a BK situation).


      • #4
        My wife has also been offered an opportunity to participate in a plan like this and I'm trying to figure out whether it is something we want to do...

        I had previously disregarded it but then re-read this post: and now I'm wondering if it's the same thing - where it is described as "Potentially worthwhile".

        Here is some of the documentation she was offered.
        Attached Files


        • #5
          It certainly sounds a lot like streamteam, greenkermit, and FoxMD from the comments of the linked article above are talking about the same basic product.

          I am sure it is insanely complicated but unless they are misrepresenting the facts in the documentation provided by greenkermit, I could see enough potential to want to learn more.

          for one thing, I would want to know whether the stated interest rate in the fixed investment choice is locked in, and for how long. If not, I would want to know the guaranteed floor on that option. I would then want to know what the graphic comparing results using the plan to taxable investments looks like using that floor rate (as opposed to the 6% they used) and I would want to see it using the actual tax rates I would be facing based on my income and state/locality of residence. If that looked favorable I could see using this account as a fixed-income component of my greater portfolio. If not, the risk-benefit would be a lot trickier to calculate.

          I would also be curious to know the parameters around which the underlying IUL policy is managed, such as whether (and how and by whom) the death benefit is adjusted to minimize the cost of insurance, and how MEC-ing the policy is avoided.

          Furthermore I would want to know who was the issuer of the life insurance, and what would happen if they, and the whole plan, went belly-up, particularly given that it looks like it is designed to hold values greater than a lot of states’ limits on the guarantee funds.


          • #6
            Originally posted by Greenkermlt View Post
            My wife has also been offered an opportunity to participate in a plan like this and I'm trying to figure out whether it is something we want to do...

            I had previously disregarded it but then re-read this post: and now I'm wondering if it's the same thing - where it is described as "Potentially worthwhile".

            Here is some of the documentation she was offered.
            The documents help.
            The organization lends the employee 15% to buy a life insurance policy that is used to guarantee the repayment of it’s contributions.
            The employee contribution will also have a 12-15% deduction for a prepaid life insurance policy to match. What I don’t understand is are their two policies or one policy?
            The investment allocation guide lost me.

            I would need to understand in numbers, both up and down markets.
            Say I contribute $50k and employer contributes $7.5k. How much goes into my account and how much comes out at the end.
            Call me skeptical, but with life insurance the death benefit is non taxable, loans aren’t forgiven.
            Follow the money flow would be suggested.
            I don’t see how the employer is risk free, the insurance costs are paid and the net benefit to the employee is actually determined.


            • #7
              Maybe I can shed a little more light as I have seen the same and talked with the rep a great deal. It seems like a decent deal but I can't help but thinking I am missing the forest for the trees.

              This plan is similar to a split dollar loan regime but with some slight differences in regards to the interest and the taxes paid on the interest. The following is long and I hope I am clear in my explanation.

              The money you put in is considered a loan but at the same time it is deducted from your salary. So if you were making 400k before, your contract is amended and changed to 350k if you decide to put 50k in a year. I don't know if it automatically goes up to 400k after you are done with the amount of years you want to contribute. I still have to ask that question now that I thought about it. Lets say you decide to do 5 years at 50k. The company puts 15% in everytime you put in a premium.

              Roughly 13% of the amount you put in (50k per year in this case) goes towards a second policy that has the solitary purpose of making the company whole. The second policy is a second to die insurance policy. It has to be you, someone else you choose (wife or adult child) and the company. When both of you die, the company is made whole for the loans (250k) and the interest on those loans (the loan regime part of the split dollar). These loans are at a rate determined by the IRS. There is a provision in this thing that lets the company refinance the loans at a lower rate at anytime if it becomes available. This second policy is very conservative in investments as the goal is to preserve the value rather than grow the value. The rates are tied to the treasury in some manner and I was told that recently it was down to below 1% so a lot of the loans over the past decade were refinanced. Overall your interest in this policy is minimal, its goal is to make the company whole and pay for the interest on the "loans" they gave you. This is how you do not need to pay for the interest or taxes on the interest (because the interest is not charged to you and it is never forgiven). There may be a time in the future where the value of this policy is high enough to cover the obligations to the company with some left over. In those cases they sometimes transfer the value over to your policy. This policy is required as part of the whole program to make it legitimate.

              Now for the policy that you care about. 87% plus 15% (the company match) goes into your policy. Only you are on this policy and you can choose beneficiaries. Only your application will be needed for this policy. For 50k, it appears as 50,313 in the illustration. The one I got was for an Allianz IUL but they also shop around two other companies, I think it was Ameritas and maybe Standard? Basically they only use AAA companies that have a reputation and have not changed the fees on the policies (of course I have no idea if this is true but this is what was told to me). I had this policy reviewed by James Hunt as others have used on this website and he came to the conclusion: @5 years -3.1%, @10 years +3.1%, @15 years +4.5%, @ 20 years +5.0% annual ROR.

              It seems like a regular IUL, there are no group life insurance discounts so you don't save anything there unfortunately. It looks like it takes 13 years for the cash value to make the accumulated value after which they rise together until you start withdrawing. Taking distributions from it are tax free and interest is free according to the policy I go (they charge you something to take it out and then credit the same back as interest). However this could change I assume because its not guaranteed. All the fees can change, and if you look at the guaranteed illustration its obvious that this would be a horrible vehicle if the company were to max out their fees.

              The policy works to reduce the amount insured as it progresses. In my example it starts out at 1.495 million, during the time you are putting money in, slowly increasing each year, the drops back to 1.45 million after you stop putting in money, then drops to 725k at year 8. The costs of the policy drop accordingly, the first 5 years its about 9k, then drops to 4.3k, then drops to 2.8k in year 8 and 963 dollars in year 16. it slowly rises from there and changes based on how much money you pull out.

              The policy has a provision that stops you from taking out too much money, if you are getting close it apparently automatically takes over and drops your death benefit, stops withdrawals and adds a 0.5% fee. Of course you can talk to someone to learn how to avoid this but as a minimum it prevents the policy from blowing up and giving you a huge tax bill later in life. The money taken out does not hit the IRS in anyway so they can't tax it. In fact because they redo your contract you the IRS actually sees that your W2 is that much less and your taxes are correspondingly less.

              They say your capital is protected at all times so you can take the money out after 3 years with no gains if you'd like which would mean you get at least the 250k tax free (don't understand how but its some combination of your policy and the side policy and the document it so you have that for what it is worth). If you do it before then you may have to put money in to make the company whole. So they say you should expect to keep the money in at least 3 years but really 5 years is what is needed to be of significant benefit. The longer you leave it in the more you can take out.

              The real benefit of this is being able to take your salary pretax in order to pay the IUL. Otherwise its just an IUL if you were to buy it, nothing special. After turning this over and over in my mind I have come to these conclusions (and this is what I am hoping someone can punch a hole in):
              • You have to have some trust in the insurance company in order for this to actually be worthwhile, because if you expect significant changes to the fees it wont be as good and then it becomes a moving target based on what you think about insurance companies.
              • The only comparison you can make is that you will be able to take out 1.2million by age 84 in the plan vs 611k in your investment account.
                • This is assuming a marginal rate of 40%
                • In the investing phase of this plan you are putting money in at an 18% tax rate. (50k, turns to 50,313 after the match and subtract about 9k for fess in first year).
                • I am not accounting for tax loss harvesting or using it for charity or whatever else the benefits of the taxable account would be
                • I am assuming you are going to use that taxable account for your retirement spending
                • Combined Federal and State tax rate on income classified as ordinary income of 39.7% Assumed total tax rate of 25.0% for after-tax investment model earnings Assumed gross and net rate of investment of 6.0% on after-tax investment model
                • You can only take out enough to ensure it doesn't blow up, they do not want it to blow up because it disrupts the entire process for both sides.
              To me the alternative use of that 50k x 5 years is putting the post tax amount into vanguard because that is what I would be doing. So that would be putting money in at a 40% tax rate. So to me the benefit would seem to be
              • This money is coming out tax free and interest fee per the policy
              • Its not hitting the IRS so it would not affect your marginal rate whenever you start taking the money out
              • Maybe you can use this money to convert your ira or 401k to roth at that time at a lower marginal rate? don;t really know what the benefits would be here but its a thing you could do
              • If you were to let this ride all the way without taking any money out, you would be able to turn 250k of earnings (about 150K after tax) into whatever this policy is worth at the end, which would likely be better than what your taxable account would be worth at that time assuming 6% return and all fees staying the same
                • Maybe this lets you spend more of your money in other accounts?
              The way the company benefits:
              • THey get to take the money you are not paid as W2 income off their books and convert it to a loan. From what I was told this takes it off of the liability column and puts it into an assets column for accounting purposes?
              • The company gets to make interest off money they would otherwise have had to pay you, whatever rate that is its still more than zero for them if they had just given you the money
              • I am assuming they can then turn around and make some fancy financial vehicles to sell to wall street and make money earlier rather than later
              • Keystone is getting paid to sell this insurance from the premiums you are paying

              In WCI article it says ask for more pay, in our case there is probably no real change of getting more pay instead of this benefit.


              • #8
                Anything this complicated and with so many variables is unlikely to be wise


                • #9
                  Originally posted by Steven Podnos MD CFP View Post
                  Anything this complicated and with so many variables is unlikely to be wise
                  •The hospital is made whole
                  •the broker and insurance company make money off the two insurance policies.
                  •Who do you think has the risk?

                  For any investment understand your risk before considering the returns.
                  You think you know taxes and investments, can you explain the risk in simple terms?

                  What could go wrong?

                  So you have a loan from your policy and the market tanks. What next? Too good to fail? Insurance sales has an answer for every objection.

                  Seems like a product to be sold, not purchased.