Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1998-11-17
2001-10-16
Millin, V. (Department: 2164)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S004000, C705S035000, C705S039000
Reexamination Certificate
active
06304859
ABSTRACT:
FIELD OF THE INVENTION
The present invention is directed to a computerized system and method for administering an employer pension plan funded with life insurance, and, more particularly, for determining the optimum premium structure necessary to achieve financial security at retirement, while providing a sufficient level of life insurance protection during employment, and ensuring that each individual policy cash value is adequate for collateral purposes.
COPYRIGHT NOTICE
A portion of the disclosure of this patent document contains material which is subject to copyright protection. The copyright owner has no objection to the facsimile reproduction by anyone of the patent document or patent disclosure as it appears in the Patent and Trademark Office patent file or records, but otherwise reserves all copyright rights whatsoever.
BACKGROUND INFORMATION
In recent times, sophisticated employer funded pension plans have been designed to provide secure and risk free benefits for employees and that, if managed correctly, provide favorable tax treatment for both employer and employee. Such pension plans have become complex in operation and structure, and often involve more than one legal entity providing services to plan participants and managers. Thus, operation and administration of such plans has become extremely difficult due to the constraints under which such plans must function to operate appropriately, and due to the required interactions between the parties, as well as due to government regulation.
Various computer systems are used by fund managers and others involved in pension plan administrations. However, due to the complexity of recent sophisticated pension plans, existing computer systems are unable to handle the operations that are required for successful plan administration.
To fully understand the deficiencies in existing computer systems that assist in the administration of pension plans and the like, a short explanation of the development and structure of recent complex pension plans is provided.
As today's workforce ages in an era of social security uncertainty, employees rely heavily on employer provided retirement income for financial security during their retirement years. Until recently, the tax qualified pension plan has been the optimal and primary funding vehicle. Under a qualified pension plan, the employer's funding contributions are tax deductible, the plan assets reside in a trust that is secure from the employer's creditors, and the investment returns grow tax free. Retirees are only subject to taxation on their retirement benefits when received.
However, this reliance is jeopardized by the rapidly changing economy that employers (which are typically corporations) currently face. During the past decade, the federal government has passed a series of tax law changes that are designed to minimize the amount of retirement benefits that can be funded via a qualified pension plan. As a result, some portion of an employee's retirement benefits are often paid by an unfunded supplemental retirement plan. Under this arrangement, the employee is simply an unsecured creditor of the employer for the balance of the retirement benefits not included in a qualified pension plan. When the employee reaches retirement age, there is a possibility that many of today's corporations will no longer exist or be in a financial position to honor unfunded promises. Thus, many employees are exposed to the risk that their retirement income will be severely restricted or not available to them upon retirement.
Similarly, most corporations purchase or sponsor group term life insurance for their employees' death protection. Again, however, favorable tax treatment is only afforded to the first $50,000 per employee of employer provided group term life insurance. In most cases, this level of insurance is inadequate to cover the financial needs of an employee's family upon the employee's death. While an employer may provide additional group term life insurance above this level, for tax purposes an employee receiving additional group term life is considered to be receiving income and is subject to a tax on an imputed income basis.
Again, the tax rules have been structured to discourage this corporate benefit. At ages in excess of 45, the imputed income often exceeds the cost of buying the insurance outside of a corporate sponsored plan. Also, many corporations have cut back on the amount of group term life insurance offered to employees. As a result, most employees, particularly senior level employees, must buy death protection outside their corporate sponsored plans. So doing, they forgo the economies of scale associated with buying life insurance coverage as a group.
As an end result, because only a minimal insurance benefit is available from their employer, many employees fail to obtain adequate life insurance. This decision exposes the employee's family to the possibility of serious financial crisis if the employee dies unexpectedly.
Most major employers have struggled with how to fund for retirement benefits in excess of the qualified pension limits. Only a few corporations to date have attempted to apply their bulk purchasing power to help their employees attain a level of adequate life insurance. Clearly, a major stumbling block is achieving retirement benefit security on a cost effective basis. Also, employers want funding programs that create incentive for employees to remain in service, such as the vesting rules that are built into pension plans.
Funding programs and plans, such as the rabbi trust, the secular trust, bonus and/or annuity plans and split dollar plans, have attempted to deal with the problems discussed above, but have one or more major defects. For example, the rabbi trust program is not secure from corporate creditors. Secular trusts provide bankruptcy protection, but require a payment of tax at funding (as well as a tax on any tax reimbursement, i.e., a tax gross-up), and the asset's investment income is taxed currently. Bonus and/or annuity plans also require tax gross-ups at the funding point and such plans do not tie the employee to the company after funding occurs. Finally, although split dollar plans can provide a nice combination of corporate sponsored death protection and tax free asset accumulation, they require an investment of cash far greater than that required to fund other types of pension plans.
SUMMARY OF PROPOSED PLAN
We have devised and designed a plan, termed an Insured Security Option Plan (“ISOP™”), to give employers a vehicle to fund their employees' deferred compensation and to provide for supplemental employee retirement plan obligations. The ISOP™ plan will overcome the deficiencies in existing plans, as described above, and will provide significant advantages to both the employee and the corporate employer. However, to operate the ISOP™ plan effectively requires a complex and sophisticated computer system, heretofore unavailable. To fully appreciate the advances made in this computer system requires a brief explanation of the ISOP™ plan. However, it is noted that the principles of the present invention are applicable to the administration of sophisticated plans other than the ISOP™ plan described herein.
The ISOP™ plan makes possible a new and cost effective funding method. It permits a multiple purchase of life contracts on behalf of employees, thus reducing the cost of the insurance for each employee. The cash value of the policy is used to accumulate funds tax free so that, at retirement, there are adequate assets owned by the employee to provide for the employee's retirement. In addition, the policy acquisition method avoids the need to gross-up the premium payment and still enables the corporation to obtain a tax deduction for the funding contribution.
It is possible to structure the purchase of a life insurance policy (most commonly a variable life policy) for the employee using a portion of money provided by an employer and the remainder by a loan through a non-qualified be
Engel Wendy J.
Melamed Samuel
Ryan Raymond B.
Evergreen Group, Incorporated
Millin V.
Patel Jagdish
Trzyna, Esq. Peter K.
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