BY DIANE WASSER CPA, PARTNER
DIRECTOR, AMPER'S PENSION SERVICES GROUP

It’s said that everyone will get their 15 minutes of fame. Well Plan Sponsors, if that’s true, your time should have run out ages ago. Always in the headlines ... and often not good news. In Amper's Pension Services Group's ongoing effort to keep our clients and friends out of the headlines, here is some more important information on your responsibilities as Plan Sponsors.

In accordance with fiduciary obligations, ERISA requires Plan Sponsors of employee benefit plans to establish a "prudent process" for selecting investment alternatives, determining that those investment alternatives are prudent and adequately diversified, and monitoring investment alternatives to assure they remain appropriate over time.

In order to carry out this very important requirement, we recommend use of a customized investment policy statement. It is important that a Plan Sponsor have sound documentation of the process in place that can be referred to in the event of any questions regarding a plan's investment decision-making process.

An investment policy statement is a written statement that:

• outlines investment objectives,
• defines the roles of those responsible for the Plan's investments,
• describes the criteria and procedures for selecting investment options and investment managers,
• describes the criteria and procedures for monitoring and reporting of investments,
• describes ways to address investment options and investment managers that fail to satisfy established objectives, and
• addresses participant education.

The statement should be reviewed at least annually along with fund characteristics and performance. At that time the plan's investment performance should be compared to appropriate market indices.

This applies to both defined contribution plans and defined benefit plans. Keep in mind that even if you sponsor a participant directed plan or have a prototype plan, the fiduciary standards apply.

The existence of an investment policy statement provides evidence of a prudent investment decision process. The absence of a statement renders fiduciaries vulnerable to legal action, either from the Department of Labor or unhappy plan participants.

Stay out of the headlines. Incorporate an investment policy statement into your pension planning process.

BY MARC SCUDILLO CPA, CFP, MBA, MS
MANAGING PARTNER, AMPER FINANCIAL SERVICES GROUP

In an era when business needs can change overnight, employers have to anticipate the needs of their employees and adapt accordingly. This is especially true for assisting owners and key employees in maximizing retirement saving opportunities.

The regulatory environment under which corporate employee benefit plans operate is a complex and dynamic one. Federal requirements under the Internal Revenue Code and the Employee Retirement Income Security Act have undergone numerous changes that have had direct and indirect implications for employer-sponsored retirement and health plans, as well as other benefit programs. In addition, corporate plan sponsors face the challenges of complying with other regulatory authorities, including the Equal Employment Opportunity Commission, the Securities and Exchange Commission, and the Department of Health and Human Services. Moreover, nongovernmental authorities — such as the National Association of Insurance Commissioners and the Financial Accounting Standards Board have developed standards and procedures with which employee benefit plans must grapple on an ongoing basis. The range of issues raised by these authorities and the courts is immense.

The continued growth of defined contribution plans reflects changes to traditional career-oriented employment patterns, concern for the future of Social Security, longer life expectancies, and individuals' desire to exercise control over their own retirement savings. Technological advances and a shift toward increased employee responsibility for retirement-related investment decisions are continually changing the way defined contribution services are delivered. Profit-sharing, 401(k), and other individual account plans are an increasingly important component of employee retirement savings.

But employers frequently seek to enhance their retirement programs to better optimize and balance the often diverging objectives of value, cost, and perception. In recent years, revolutionary approaches that merge defined benefit and defined contribution concepts have led to the development of the cash balance plan and other hybrid plans.

The cash balance plan design expresses the retirement benefit in terms of the value of an accumulated lump-sum amount, typically providing a portable, more understandable benefit. The presentation and delivery of retirement income has the feel of a defined contribution plan, while the flexible design and funding alternatives of a defined benefit plan are retained. Some of these plans have allowed for increased benefits to owners and key employees of $60,000 to $200,000 or more while keeping costs at a negligible amount for the company.

Amper has been involved with the full spectrum of defined contribution and defined benefit plans. Creative and proactive professionals can help employers find innovative solutions to benefit plan design, funding, accounting, compliance, communication and investment issues.

Securities offered through Securities America, Inc. (Member NASD/SIPC)
Advisory services offered through Securities America Advisors, Inc.
2015 Lincoln Highway, Edison, NJ 08818; 732-287-1000 (ext. 312)

SPLIT DOLLAR — Two Critical Events

BY PAUL VECCHIONE
AMPER FINANCIAL SERVICES GROUP

Two events are critically important when considering split dollar insurance arrangements. First, regulations governing this method of financing a life insurance premium became final on September 12, 2003 and affect all arrangements entered into after September 17, 2003. Second, on January 3, 2002, the Internal Revenue Service issued IRS Notice 2002-8, providing optional transitional rules for arrangements in existence prior to January 28, 2002 and which must be acted upon by January 1, 2004. Taxpayers are free to continue arrangements under old rules, but face potential taxation of equity at lifetime termination of the arrangement. Following is a brief overview of the transitional rules and an overly simple summary of the strategies to consider for plans governed by the final regulations.

Transitional Rules
Two "safe harbor" rules exist for taxpayers with arrangements in existence prior to January 28, 2002, where a sponsor has made premium or other payments under the arrangement and has received or is entitled to receive full repayment of premiums.

Action taken under either of the two rules is intended to protect the employee's equity from taxation at termination of the arrangement. The first choice is to terminate the split dollar arrangement before January 1, 2004. The second choice is to have the parties treat all previous premium advances (less any repayments already made) as loans going forward. This treatment must begin by January 1, 2004. The OID rules of IRC sections 1271-1275 and the below market loan rules of IRC section 7872 will apply. Now that final regulations on split dollar have been issued, those rules should be followed.

Arrangements Governed by Final Regulations
Tax treatment going forward follows one of two regimes: economic benefit or loan; the regime is (fundamentally) determined by who "owns" the life insurance contract. Economic benefit treatment is used when the employer owns the policy, and loan treatment applies when the employee owns the contract.

The economic benefit regime is very similar to what was known pre-final regulations as the "endorsement" method. Here, the employer has title ownership of the policy and by beneficiary designation assigns most of the death benefit to the employee's personal beneficiary. The "cost," from a tax perspective, is tax paid by the employee on the "economic benefit" of having the net death benefit payable to the personal beneficiary.

Since the policy and thus all the cash value belong to the employer, there is no "employee equity." The new regulations, however, do provide rules in the event the employee has "current access," defined as a current or future right to policy cash value, but simplicity and current tax on what may (or may not) become a future benefit tells us it is best to avoid "current access" or any form of employee equity in a plan under the "economic benefit" regime.

It is also possible to structure a plan under this regime with tax consequences as outlined above where the employee or an irrevocable life insurance trust has title ownership to the policy and retains only the death benefit in excess of the greater of the employer's premium payments or the policy cash value (formerly known as "non-equity collateral assignment method").

With the loan regime, the employer treats premium advances as "loans," and to the extent sufficient interest is paid (at least the applicable federal rate as of the date the loan is made), the new split dollar regulations need not apply. If no interest is specified, then the below market loan rules of IRC Sections 7872 and 1271-1274 and the new split dollar regulations will govern the taxation of the arrangement. To the extent gifts are made, gift tax rules will apply.

Loans can be on either a demand or term basis, and each has different rules. The final split dollar regulations also outline a "special rule" for certain arrangements: (1) where the term is measured by the life of the insured, (2) where continuation is based on the employee's performance of substantial services and (3) gift term loans. In general, this rule provides for use of either the midterm or long-term AFR, but applies annual income taxation. For gift term loans, the gift is measured by OID despite the fact the income tax is applicable annually.

The possibility of substantial changes in the applicable interest rate can make predictability of the income tax and gift tax consequences of the split dollar arrangement quite challenging. New rules bring new challenges, but also present great opportunities. Now is a good time to review any existing split dollar arrangements you may have and chart out the most effective course of action. For more information on the intricacies of these new rules, contact Paul Vecchione or your Amper tax representative.

Securities offered through Securities America, Inc. (Member NASD/SIPC)
Advisory services offered through Securities America Advisors, Inc.
2015 Lincoln Highway, Edison, NJ 08818; 732-287-1000

THE DIGITAL MANUFACTOR — Planning Tools Reduce State Business Taxes

BY STEPHEN BERCOVITCH J.D.
SENIOR MANAGER

As different states compete for business, virtually all allow methods for manufacturers to reduce business taxes. Manufacturers are especially desirable because the investment in plants and equipment bolsters the local economy, supports the real estate market, and creates jobs. This goes double for "the digital manufacturers" — non-polluting, cutting-edge enterprises that include photographers, printers, pre-press shops, graphic artists, software programmers, web site content creators and updating, web site design, etc.

If your company can choose to deliver a tangible product such as a computer disk or CD Rom out of state as the result of its services, this exciting planning tool is at your fingertips.

Under the income taxes of virtually all states, revenue from services is earned at the place where the service is performed, and revenue from sales of property is derived from the state where the property is delivered (regardless of where it is manufactured). This means that profits can often be "allocated" outside of the home state; yet at the same time may not be taxable in the state where the client or customer is located (some states - New Jersey and California for example — have tax laws that limit this benefit). Uniquely, "the digital manufacturer" can often choose to deliver its product on-line (a service) or produce a computer disk or CD Rom. Anything from films, pre-recorded music, artwork, photography and computer software, to web site content, graphics, sound and video products that are not often thought of as tangible "products," can be embodied in a tangible media, shipped via common carrier, and thereby "sold" outside the home state. In addition to this benefit, the purchase of equipment, including computer equipment and peripherals, that is principally used in the production of property, can often qualify for investment credit treatment and sales tax exemption, thereby saving additional state business taxes. The details of the equipment leases should be reviewed by your tax advisor to make sure that leased equipment qualifies equally for these benefits.

The caveat is a lurking sales tax issue if the company also sends representatives or employees to the out-of-state jurisdiction, for example to provide ongoing software maintenance under a contract; or, to consult with an advertiser on the graphics and layout of printed advertising material. In most states, even if a disk, tape, or CD Rom is shipped into the state by common carrier, the sale of property, when combined with the regular presence of employees at a client's facility, can create a sales tax collection obligation not otherwise present.

As the future unfolds and additional bandwidth on the Internet becomes available, the tendency may be to stick with the e-commerce, online (intangible) delivery model. This may serve inadvertently to locate the revenue of a business in the home state when that business could choose otherwise and decrease the total state and local business taxes paid. Consult closely with knowledgeable tax advisors when in doubt, because the application of state tax law is as much in flux as technology is. For digital manufacturers, knowing the rules of the game and developing a good working relationship with professionals who understand your business can result in the application of tax saving tools that depend upon how your business practices are configured.

THE INSURANCE — It's Not A Cookie Cutter Process

BY BARRY WELLS CCLA
DIRECTOR, INSURANCE INDUSTRY SERVICES

In its simplest form, insurance is nothing more than a promise between two parties to fulfill a commitment. You, as the insured or policyholder, agree to pay a premium, to cooperate with your insurer and to keep them apprised of any changes related to the risk they have undertaken. The insurer or risk taker, on the other hand, promises to honor claims submitted by the policyholder under the terms and conditions of the insurance contract. Simple and to the point, right? Well, not always, and that's why it’s so important to understand your insurance program, the nuances of the coverage you have in place and what you may expect when it comes time for the insurer to fulfill their promise.

A good place for us to start our discussion is to explore two common types of insurance programs: Deductible Insurance Coverage and Self- Insurance. (For the purposes of this discussion, our basis will be commercial insurance as opposed to personal lines or life and health coverages.)

Deductible Insurance Coverage Programs
Deductible Coverage is perhaps the most recognizable form of insurance that many of us are familiar with. Insurance is secured specific to your exposures, either directly from an insurance company or through an independent broker who represents a variety of insurance companies. Typically, and dependent upon the type of coverage underwritten by the insurer, claims are paid after the application of a deductible and subject to the terms and conditions of the insurance contract. The premium charged is based on both the type and "quality" of the risk. For example, if you are attempting to secure a liability form of coverage and you've experienced claims in the past, the cost of your premium may be higher because of your previous loss experience.

The primary benefit of this approach is that the insurer takes full responsibility for the management of your insurance program, including the claim process. This is an especially effective approach if you have routine insurance exposures that you're attempting to manage. However, unlike a self-insurance program, which we will discuss in a moment, you will generally have limited control over the ultimate resolution of a claim.

Tips:

• Form a partnership between your broker and the insurance company, especially the claims department.
• Use your insurance broker effectively. They are your primary advocate and liaison with the insurance company.
• Appoint a primary contact for your insurance company to work with. This is especially important concerning worker’s compensation claims.
• Understand your insurance company's reserve and settlement process. You may only be responsible for the deductible; however, your loss history impacts your insurance premiums.
• Learn about your insurance company's claim litigation program. What law firms do they use and what can you expect if a lawsuit is filed against your insurance coverage? Secure loss runs to assist you in tracking loss information.
• Avail yourself of the insurance company's technology. Many insurers now offer web access for their customers, which is another opportunity to stay on top of your insurance program and claims activity.
• Communicate, Communicate, Communicate. The single most important tool in forming an effective relationship with your insurance company is frequent and ongoing communication.

Self-Insured Programs
Unlike a deductible insurance program, Self-Insurance involves an approach by which you share in your own risk. That portion of risk that you undertake to handle is called a self-insured retention (SIR). Excess insurance coverage "sits" above the SIR to be available for claims that are in excess of the SIR and subject to specific terms and conditions. Common coverages for self-insurance may include workers' compensation, general and auto liability, product liability and property. Self-insurance offers the potential benefits of cost reduction and increased control over your overall insurance program, especially claim management.

Self-insured programs are both regulated and non-regulated. Each state's authorities that establish the regulations govern regulated programs. Much of the focus is on the financial condition of the entity forming the self- insured program, ensuring there is the financial capacity to securitize loss reserves that are within the SIR. This assurance is typically conferred through cash, letters of credit and/or bonds. Note that workers' compensation and auto liability exposures can only be self-insured as regulated programs. Also, be aware that the regulatory agency will be responsible for monitoring these programs. By comparison, non-regulated self-insurance offers a greater degree of flexibility. A consultation with your insurance professional will help determine which program is the right match for your self-insurance needs.

Claim management is, of course, a key component to any insurance program and equally as important as it relates to self-insurance. Unlike the more traditional insurance relationships, such as the deductible program where the insurance company manages the claims, as a self-insured entity it is the self insurer that manages the claims within the SIR. Typically, the self-insured will either establish an internal claim department or outsource this responsibility to a Third Party Administrator (TPA). The decision as to which option is appropriate is largely driven by the size of the self-insured program, the types of coverages involved and what regulatory requirements mandate. Clearly, development of an internal claim department and/or the selection of a TPA are critical decisions relating to the overall effectiveness and success of the program.

Finally, as with any insurance program, the self-insured approach does come with some disadvantages. A regulated self-insurance program carries with it significant administrative issues, including ongoing scrutiny of the claim management operation. Also, monitoring the loss reserve funding is critical to ensure that the organization is not "surprised" by a significant claim settlement only to determine funding is somehow inadequate to pay a claim.

Both of these insurance approaches have their own distinct advantages and challenges. The key is determining what your insurance needs are by working with your insurance professionals to evaluate and model a program that addresses your specific needs and affords you, your company and your employees the appropriate insurance coverage as a component of an overall effective risk management program.