MULTIPLE EMPLOYER TRUST



A Multiple Employer Trust (MET) is a group of ten or more employers who form a trust in order to minimize the tax implications of providing certain types of benefits for their employees, particularly life insurance. The U.S. Congress authorized the formation of METs in 1984 under Section 419(A) of the Internal Revenue Code. The rules set forth for METs are stringent and require that no single employer contribute more than 10 percent of total funding for the benefit plan purchased by the MET. In addition, the MET must be an indivisible entity, with all participating employers sharing equally in the benefits forfeited by other members of the group. The employees of each participating employer are viewed as if they worked for a single company and are subject to the same requirements

A similar arrangement to a MET is a Multiple Employer Welfare Arrangement (MEWA). MEWAs include plans established by two or more employers to provide welfare benefits to their employees, including health care and pensions. The main difference between a MET and a MEWA is that a MEWA is generally subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), which regulates pension plans of businesses with more than 25 employees and imposes penalties on employers for breaches of fiduciary duty.

The main purpose of a MET is to give entrepreneurs and small business owners a tax-friendly way to provide life insurance benefits for themselves and their key employees. Under ordinary circumstances, life insurance is tax deductible for the employer in the current year, but any amounts that could be considered "bonus" life insurance must be reported as taxable income by the employee. Larger businesses are often able to get around this problem by funding life insurance benefits as part of a qualified retirement or profit-sharing plan. Although the benefits provided through such plans are usually tax free, there are a number of restrictions and complicated paperwork requirements associated with them that reduce the attractiveness of life insurance for smaller businesses. For example, the government requires companies that set up qualified plans to establish eligibility and vesting rules and then offer the benefits to all employees who meet them.

THE IMPORTANCE OF LIFE INSURANCE

It may seem odd for small businesses to go to the trouble of forming a MET just for the sake of providing life insurance for employees. But life insurance has a variety of uses that make it a very attractive benefit, particularly for key employees. A small business might need to provide life insurance to its workers in order to compete with larger companies in attracting and retaining qualified employees. For example, in addition to providing benefits upon the death or disability of the insured, some forms of life insurance can be used as a tax-deferred investment to provide funds during a person's lifetime for retirement or everyday living expenses. There are also a number of specialized life insurance plans that allow small business owners to reduce the impact of estate taxes on their heirs and protect their businesses against the loss of a key employee, partner, or stockholder.

Small businesses tend to depend on a few key people, some of whom are likely to be owners or partners, to keep operations running smoothly. Even though it is unpleasant to think about the possibility of a key employee becoming disabled or dying, it is important to prepare so that the business may survive and the tax implications may be minimized. In the case of a partnership, the business is formally dissolved when one partner dies. In the case of a corporation, the death of a major stockholder can throw the business into disarray. In the absence of a specific agreement, the person's estate or heirs may choose to vote the shares or sell them. This uncertainty could undermine the company's management, impair its credit, cause the flight of customers, and damage employee morale.

Life insurance can help small businesses protect themselves against the loss of a key person by providing a source of income to keep business running in his or her absence. Partnership insurance basically involves each partner acting as beneficiary of a life insurance policy taken on the other partner. In this way, the surviving partner is protected against a financial loss when the business ends. Similarly, corporate plans can ensure the continuity of the business under the same management, and possibly fund a repurchase of stock, if a major stockholder dies. Although life insurance is not tax deductible when the business is named as beneficiary, the business may deduct premium costs if a partner or owner is the beneficiary.

MET REQUIREMENTS

Participating in a MET enables a small business to provide life insurance to its key employees without subjecting them to negative tax implications. It does this by allowing tax-deductible contributions to a life insurance plan, made by the employer on behalf of employees, to be used for severance benefits. Basically, the cash value of the life insurance is available for severance benefits, while the mortality portion of the life insurance is payable to the beneficiary named by insured. A MET must be structured properly in order to comply with the tax laws, but the rules are significantly less extensive than with qualified pension and profit-sharing plans.

The rules that a MET must follow in order to gain tax benefits are laid out in IRS Notice 95-34. This notice states that severance benefits can only be paid when the termination of employment is beyond an employee's control. Otherwise, if the severance arrangements appear to be providing deferred compensation benefits to an employee, the employer's tax deduction will be denied. The notice also states that the deduction will not be allowed for "nondeductible prepaid expenses," which may include contributions to the plan that are made as lump sums or using accelerated funding techniques.

FURTHER READING:

Anastasio, Susan. Small Business Insurance and Risk Management Guide. U.S. Small Business Administration, n.d.

Budihas, John S. "Multiple Employer Trust Used for Fringe Benefits." National Underwriter Life and Health. September 4,1995.

"Department of Labor Holds That a Health Care Program Is a MEWA." Tax Management Compensation Planning Journal. January 1, 1999.

White, Jane, and Bruce Pyenson. Employee Benefits for Small Business. Prentice-Hall, 1991.



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