More on Health Care Costs

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State-by-State Review

Conclusion

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MasterCard Warns of Possible “Massive” Data Breach

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“Breaking-News” Report

According to Andrew R. Johnson, MasterCard Inc. MA -1.36% just reported that it is investigating a possible breach of cardholder account data involving a U.S.-based payment processor.

The Purchase, N.Y., credit-card company said law enforcement has been notified of the matter and an “independent data security organization” is conducting an ongoing forensic review of the matter. The company is alerting card-issuing banks regarding “certain MasterCard accounts that are potentially at risk.”

Assessment

Link: http://online.wsj.com/article/SB10001424052702303816504577313411294908868.html

Is there an object lesson here for HIT data protection and EHR identity theft?

Conclusion

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Welfare Benefit Trust Plans for Physicians?

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A SPECIAL REPORT FOR THE ME-P

“Hall of Fame” for Egregious Investment Advice

By David K. Luke MIM, Certified Medical Planner™ - candidate

[Physician Financial Advisor – Fee Only]

www.NetWorthAdvice.com

www.CertifiedMedicalPlanner.org

Physicians unfortunately often become unwitting targets of some very egregious investment advice. Usually it involves an investment product with an imbedded fat commission just waiting to be deposited in a “financial advisor’s” bank account.

In the “Hall of Fame” of egregious investment advice is the Welfare Benefit Trust. About 10 years ago, while I was working for a top five national brokerage firm (this was before my fee-only days when I was still on the “dark side”) our internal Insurance Products Department at the brokerage firm’s head office presented an amazing investment product. This “Welfare Benefit Trust” we were told should be shown to our profitable small business owners as a cure for their every ill caused by paying too much taxes. A Welfare Benefit Trust essentially works like this:

  • The business provides a fringe benefit for their employees, such as health insurance and life insurance.
  • The benefit is established in the name of a trust and funded with a cash value life insurance policy
  • Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company, and
  • The owners of the company can withdraw the cash value from the policy in later years tax-free.

Yes, the holy grail of tax avoidance has been achieved: tax deductible up front and tax-free when you withdraw. By the way, if you are not familiar with such investments there is a reason. They are not legal by the tax code. Physician practices, as well as other small and mid-sized businesses, became buyers into these welfare benefit trusts as they were sold as a way for the practice to “protect” a large profit in a certain year from being taxed. We were told it was not uncommon for a single transaction into a welfare benefit trust to be $200,000 to $300,000 dollars or more in a single premium payment, yielding typically a six-figure commission check.

A few years later the gig was up as it became obvious these could not be tax legal. My understanding is that most medical practices that bought these “unrolled” them when the major brokerage firms realized that avarice got the best of them and stopped selling them. In 2007, the IRS and the Treasury Department issued a formal warning cautioning “about certain Trust Arrangements Sold as Welfare Benefit Funds”. The IRS called these “abusive schemes” and made such a transaction what the IRS lovingly calls a “listed transaction”. Essentially, a listed transaction is a transaction that the IRS has determined to be a tax avoidance transaction. The IRS even keeps these Listed Transactions on their website, listed in chronological order from 1 to 34. Welfare Benefit Trusts is #33.

Good Welfare Benefit Trusts

First of all, it is important to mention that “there are many legitimate welfare benefit funds that provide benefits” according to the IRS. Internal Revenue Code Sections 419 and 419A spell out the rules allowing employers to make tax-deductible contributions to Welfare Benefit Plans. There is nothing wrong with these plans and no mystery to them. After all, a medical practice or any business for that matter is allowed to deduct the costs of doing business as an expense. This includes employee salary and benefits.

VEBAs (Voluntary Employee Benefits Association) have been around since 1928 and are used by employers to provide health, life, disability, education and other benefits for their employees and are the original Welfare Benefit Trusts. When properly established and executed, a VEBA can be a legitimate employee benefit structure. In 2007 the United Auto Workers, in order to relieve the Big 3 Automakers from carrying the liability for their health plans on their accounting books, formed the world’s largest VEBA with over $45 billion in assets.

Bad Welfare Benefit Trusts

However, the IRS does have a problem with Welfare Benefit Plans that are promoted to small business owners as a scheme to avoid taxes and provide medical and life insurance benefits to key employees that in substance primarily serve the owner(s) of the business. These 419 Welfare Benefit Plan schemes claim that the employer’s contributions are deductible under IRC section 419 as ordinary and necessary business expenses, allowing the business owner to provide a life insurance policy for his favorite employee, himself, and accumulate cash value in a life insurance policy.

Lest there be any confusion or debate, IRC 264(a)(1) states:

(a) General rule

No deduction shall be allowed for -

(1) Premiums on any life insurance policy, or endowment or

annuity contract, if the taxpayer is directly or indirectly a

beneficiary under the policy or contract.

While VEBAs have been used properly, as in the UAW example above, unfortunately they are often a front for an abusive tax shelter. In the 1970’s VEBAs were being used by the wealthy as a popular tool for tax reduction and asset protection. In 1984 Congress passed the Deficit Reduction Act, which limited the use of VEBAs. In the 1990’s however VEBAs were structured to give business owners tax benefits not allowed and got back on the IRS radar. Two state medical societies along with a neonatology group practice became test cases by the IRS that helped close those VEBAs with abusive tax structures and purporting to be employee welfare benefit plans: Southern California Medical Professionals Association VEBA, New Jersey Medical Profession Association VEBA and Neonatology Associates, PA. Although the VEBAs claimed to have favorable determination letters, the actual execution of the plan did not comply with the law, mainly by allowing the employees to hold term policies in the plan that could be converted into universal life policies at the same insurer and use the conversion credit account to spring cash value in the policy. This then allowed policyholders to borrow against the UL policy as a supposedly nontaxable source of retirement income, with the repayment of the loan paid out of the policy’s death benefits. (“Making Welfare Plans Work”, Advisor Today, September 2000 P 110). This of course is not allowed under the tax code.

Those that think that they may be in the clear with their abusive tax shelter because:

  1. A large passage of time has occurred since they have owned it
  2. They have a favorable determination letter
  3. Other honorable businesses/ Medical Societies also have the same tax shelter
  4. My insurance agent said it was legal

may want to read the 98-page ruling by the United States Tax Court filed on July 31, 2000 in the case of the above-mentioned Neonatology and related cases. The long arm of the IRS reached back 9 years to 1991, 1992, 1993 disallowing hundreds of thousands of dollars and assessing deficiencies and huge “accuracy-related” tax penalties. Even the doctors that had died since then were not given a break either; their estates and surviving widows were assessed the deficiencies and penalties.

In 2002 the IRS talked Congress into passing new laws basically killing the use of multiple employer 419 plans. Some TPAs (third party administrators) that had set up the multiple employer plans discovered that they could use single employer 419 welfare benefit trusts and VEBAs because Congress forgot to include them when they passed the negative laws shutting done the multiple employer plans. This forced the IRS to issue notices 2007-83 and 2007-84, Rev. Ruling 2007-65 and make welfare benefit trusts listed tax transactions now on the listed tax transactions list. (“Negative IRS Notices On 419 and VEBA Plans” Roccy M. Defrancesco Nov 1, 2007)

Ugly Welfare Benefit Trusts

I call these “Ugly” because these Welfare Benefit Trusts were sold to small business owners after the 2007 IRS listed transaction warning, and after the multiple IRS notices and revenue rulings. The major brokerage firms by 2004 had stopped selling Welfare Benefit Trusts to protect their own financial interests, realizing these were compliance and lawsuit time bombs. The 2007 IRS listed transaction notice along with multiple other notices however did not seem to stop some smaller broker dealer firms and life insurance agents from promoting these.

I have become aware of the fact that Welfare Benefit Trusts that are in violation of the basics of the tax code (unlimited full deduction of premium,  100% tax free distribution to owner of cash value) are still being sold even today and even affecting existing clients. These Welfare Benefit Trusts go by many different names and the insurance agents selling them are using a number of different insurance companies to fund the plan. These plans involve the sale of an insurance policy usually with a six-digit premium that often pays the insurance agent a six-digit commission, so perhaps I should not be surprised that individuals (physicians?) are still being victimized

Conversation with IRS Attorney on Welfare Benefit Trusts

On January 20, 2012 I discussed with Betty Clary, an IRS attorney that helped draft the listed transaction #33 on the IRS website, on what exactly the IRS considers an abusive Welfare Benefit Plan. She stated that, once you take out the fact that the trust cannot be offering a collective bargaining element which is covered by another IRS code, there were three elements they look for:

  1. There has to be a Trust that claims to be providing welfare benefits
  2. There is either a cash value policy involved that offers accumulation or a policy in which money is set aside for a future policy in which accumulation occurs, such as a term policy that can then offer a higher accumulated value.
  3. The plan cannot deduct in any year more than the benefit provided. For example if the plan just provides a death benefit, the most that can be deducted in a year is only the term cost of that benefit, not the entire premium. If the plan offers medical benefits, then only the cost (what was paid out to the employee) for that benefit can be deducted in that year.

I found it interesting that the IRS is pursuing this broader definition as an abusive plan. Betty explained that in the case of a discovered abusive Welfare Benefit Plan, the IRS would disallow the deductions, assert income back to the owner as a distribution of profits, and assess penalties. The courts are clear that you cannot get out of penalties by claiming you are relying on the person that sold you the Welfare Benefit Plan.

What if you currently have a Welfare Benefit Trust for your Practice?

Realizing that someone you trusted has financially devastated you, carelessly misguided you and sold you a bogus tax program in order to pay cash for his new 7 series BMW can be a difficult and rude awakening. After accepting the fact that your Welfare Benefit Plan you have for your practice meets the basic criteria as mentioned in this article as an abusive transaction, I would recommend that you consult an attorney that specializes in pursuing promoters of abusive Welfare Benefit Plans and discuss your options. I have had discussions with Lance Wallach, an accountant and expert witness used in a number of Welfare Benefit Trust cases, which has confirmed to me that you must be proactive. You may be advised to file an IRS form 8886, which is a disclosure form related to prohibited tax shelter transactions. The penalties for failure to file a form 8886 can be stiff. Of course, filing this form will open the Pandora’s Box on your Welfare Benefit Trust to the IRS. Lance has told me that many of these 8886 filings are done incorrectly. An incorrectly filed IRS form is an unfiled IRS form, so please consult a CPA who is experienced in this area. Your attorney that has expertise with Welfare Benefit Trusts will be able to guide you with this. Regarding recourse, according to Lance, most all cases are settled out of court, as the insurance company, the agent, and the agency prefer to avoid the publicity.

Conclusion

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Healthcare Reform Thru 2018

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An Evolving System

Conclusion

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What’s at Stake in the Supreme Court’s Health Care Decisions?

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On the PP-ACA

By Lena Groeger ProPublica

Yesterday, the Supreme Court began hearing arguments on the health care reform law. So, in this essay, we made a map of the possible outcomes following the Court’s schedule over the next three days.

The Court will hear all three days of arguments, even if they eventually decide not to decide the bulk of the case, and is unlikely to issue a decision on the case until late June or early July.

Assessment

Link: http://www.propublica.org/special/mapping-the-supreme-courts-health-care-arguments

For more information on different states’ progress implementing health care reforms, see this comprehensive list.

Conclusion

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What Type of Automobile Should Future Physician Millionaires Drive?

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Re-Thinking Previously Owned [Used] Vehicles

By Rick Kahler CFP® MS ChFC CCIM

www.KahlerFinancial.com

Have you ever seen a Super Bowl ad touting how much money you could save if you bought something second-hand? Of course not! There’s not a lot of encouragement in our culture to buy used stuff. Even the one exception, a used home, is described as “existing.”

Badge of Honor

Buying used just isn’t cool—that is, unless you’re a wealth builder. Many of them look upon buying used as more of a badge of honor than an embarrassment. Certainly, there are many items that are best purchased new. Toothbrushes, toilet paper, and underwear come to mind. Yet there’s one thing that’s almost always better to buy used—a vehicle.

The Myths

Let’s look at a few common myths around buying a new [previously owned] car.

  • “Buying a used car is just buying someone else’s problem.” That can certainly be true if you don’t do your homework. When shopping for a used car, be sure you research the model’s repair record. The best place for this is Consumer Reports. An inexpensive online subscription will give you loads of detailed information about every year, make, and model. Narrowing your search to the top used car values will significantly increase your odds of buying a great used car. Before writing a check for even a top-rated used car, take it to a trusted mechanic for an evaluation. The money you spend will be well worth the future headaches you save.
  • “Never own a car that is out of warranty.” This is a good idea only if your heart is set on owning one of the many cars ranked as the least reliable. The warranty will come in handy because the car will spend a significant amount of time in the shop. Also, the value of a new car drops rapidly in the first few years. If instead you buy a used vehicle with a high reliability rating the warranty become less important, especially when you consider you’ll be getting a third to half off the sticker price. If you buy a low-mileage, late model car, your savings will be enough to more than pay for the few times you may need to take it into the shop.
  • “When a car hits 80,000 miles it’s time to get a new one because it will start costing an arm and a leg to maintain.” Once again, a top-rated used car will often run reliably for well over 120,000 miles if it’s maintained. Yes, the maintenance will increase, but the rapid depreciation of a new car will cost much more than maintaining an older car. Wealth builders routinely buy late model cars with low mileage and own them for 10 years or more.
  • “I can get a lower interest rate and longer term loan on a new car.” Here’s my rule of thumb: If you need a loan to buy a new car you are probably buying too much car. Those who manage money well create a savings account for replacing their vehicles. That way they can pay cash for a car and drive the best deal. If you must get a loan, borrow as little as possible and pay off the loan quickly. A higher interest rate on a shorter term loan on a used car is still a much better deal than what you would lose in depreciation on a new vehicle.

Assessment

Americans, especially doctors, have a love affair with their cars. Still, for most of us a new car is a luxury, a big splurge best purchased after we’ve attained financial independence. The best way to travel the road to that financial independence is in a used car.

Conclusion

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