The Advanced SalesJournalBrought to you by the Advanced Consulting Group of Nationwide®

JULY 2019

THE LTC TALKCLIENTS NEEDand how to prepare

Why ERISA matters, even when it’s nonqualified

Using HSAs in retirement

planning

AND

+

IN THIS ISSUE(Click to go directly to each)

Including health savings accounts as a retirement planning tool

Page 6

Preparing for an effective LTC conversation with clients

Page 8

Create income using deferred annuity to immediate annuity partial exchanges

Page 13

It's nonqualified — Why should I care about ERISA

Page 16

What's new in the 2018 Farm Bill

Page 21

Utilizing retirement plan contributions to maximize the IRC 199A deduction

Page 24

A more secure retirement is all about proper planningLongevity planning isn’t based around a single strategy but instead an entire game plan for making the most of your retirement years

I’ve had the pleasure of leading the Advanced Consulting Group for 15 years and in my time we’ve produced thousands of white papers, presentations and other marketing pieces aimed at educating about and around technical, and often complex, concepts. Still, after all these years, it brings a smile to my face when I hear how something we produced was positively received and utilized by wholesalers and advisors.

We received wonderful feedback about the March issue, which was our first after we reworked what the Advanced Sales Journal could and should be. I believe it was a success because we are sticking with our core mission of providing useful and relevant content that our advisors and their clients need to prepare for a secure retirement. Financial services, while at times is complex, doesn’t need to be intimidating.

As we head down the path of regularly producing this Journal, we hope we continue to hear from you. Your thoughts go a long way in helping us know we are on the right track.

In sticking with our goal of providing thoughtful analysis, I’m delighted to share this issue that highlights some fantastic writing by the

consultants in the ACG.

Longevity and preparing for our extended time in retiremement is a popular topic in many circles now. According to the Centers for Disease Control and Prevention, life expectancy for those living to age 65 has increased in recent years and it will almost assuredly continue to increase as we see advancements in medicine and health care. In 2012, a National Academy of Sciences study predicted that by 2050 we will spend nearly a

quarter of our lives in retirement. Furthermore, a recent article from the Stanford Center on Longevity said that if life expectancy increased by three years by 2050, as expected, the cost of aging would increase by 50%. Wow!

Contents

We always welcome input and suggestions for our publications. Please direct comments to:

Chad QueenCommunications Consultantp 614.249.5178e queenc3@nationwide.com

Leader notesGail Chrisley

3

Clients are no doubt concerned if they have prepared enough for their retirement and we know advisors are being asked questions in the hopes of finding solutions that may quell some of those concerns.

An AARP Bulletin from March of last year stated that only 7.2 million Americans have LTC coverage while the chances of actually needing long-term care are 50/50. That’s a gamble that many Americans are unwittingly taking. Shawn Britt, our long-term care specialist and a widely regarded industry authority on LTC, wrote an excellent paper on talking to clients about the need for long-term care coverage. She does a great job of laying out ways to open the doors to a conversation about long-term care. This should provide you with the tools to have a very necessary conversation.

Also, our annuity and IRA team leader, Tom Duncan provides a snapshot of creating income in retirement through the partial exchanges of a deferred annuity to an immediate annuity. This strategy, if done properly, can provide much needed retirement income in a more tax efficient way.

I hope you enjoy the rest of the content featured as well. They are all new additions to our library and provide a good example of the wide array of topics the ACG covers. I look forward to hearing from you!

Gail ChrisleyGail Chrisley, JD, CPA, MSMS, CLU®

Associate Vice President, Advanced Consulting Group

ACGspotlight

Client: Multi-generation farmersBusiness: Grain farm and livestockLocation: Southeastern, Ohio

This family was referred to Nationwide’s Land As Your Legacy® program through an advisor after one family member and spouse expressed interest in purchasing life insurance policies. After a review of the elder generation’s operation, it was determined that they were operating as an informal partnership, had no estate documents, were carrying debt, lacked sufficient life insurance coverage, and had few retirement assets. Additionally, the family would like to continue the operation into the next generation but is concerned that the farm may not be able to fully support all of the adult children interested in being involved.

Under the consultation of the ACGs Ken Boothe, a plan was built that would establish a will and revocable trust. The plan also called for the arrangement of a buy/sell agreement involving the use of life insurance between the senior generation and a farm active heir, and the purchase of life insurance by the senior generation to balance inheritances, provide liquidity, and add long-term care protection.

One other large component of the plan featured the establishment of a business entity for the farm operation. This step would provide liability protection, formalize business agreements and ease in the successful transition of the operation from one generation to the next.

To date, the family has purchased multiple term life insurance policies for debt coverage and survivior needs, and are working towards addressing the other considerations outlined in their plan.

4

1 2017 Profile of Older Americans, The Administration for Community Living, U.S. Department of Health and Human Services2 Genworth Cost of Care Survey 2018, Based on 12 months of care, private, one bedroom. Referred to residential care facility in California3 Genworth Cost of Care Survey 2018, Based on 44 hours per week by 52 weeks 4 Genworth Cost of Care Survey 2018, Based on 365 days of care

There are strategies to help manage these costsNationwide’s Advanced Consulting Group can help advisors find the right strategies for their clients.

Longevity and the rising cost of care

The population of Americans age 65 and older continues to grow

The cost of that care is rapidly rising

67% 19% 54%

82.3 millionThe number of older persons expected by 2040, over twice their number in 20001

As their age increases, so do their personal care needs

65-74

3% 9%

22%

75-84 85+

The percentage of adults needing personal care, as of June 20171

Assisted living facility cost increase from 2004 to 20182

Home health care aide from 2004 to 20183

Private room nursing home from 2004 to 20184

5

Check out what’s new

8

Here is a strategy that may help……..

• Clients age 59 ½ or older can use a portion of qualified funds to:– Plan a strategy that helps protect their portfolio

from depletion due to LTC costs – And helps provide some tax management Create a

distribution for a multi-pay premium that will purchase

CareMatters linked benefit LTC

Must be age 59 ½ of older or avoid 10% penalty on distribution

• Funding CareMatters® with IRA distributions• Advanced techniques in business life case

studies• Life insurance solutions for businesses• Tax-exempt organizations: Challenges and

solutions for recruiting and retaining key executives

• Limitations on contributions, benefits and deductions for various types of retirement plans

• The concept of reasonable compensation• The life insurance professional as estate

planner• Today’s retirement plan advisor - Doing

business in a changed environment• Retirement savings opportunities for business

owners

Contact the ACG to find out if these or others are available for continuing education (CE)

• Is this life insurance — A brief explanation about the cash value accumulation test and guideline premium test

• Qualifying for social security as a farmer or rancher

• The case of deferring compensation to an employer sponsored plan

• Today’s retirement plan advisor• Addressing ERISA concerns when

adding HSAs as an additional savings tool

• Health care planning for farming baby boomers

ACGpodcast

The Advanced Consulting Group Podcast has new episodes available to listen now or share on social media(click the thumbnail to go to the podcast home or click on the individual episodes)

Tax aspects of immediate annuitiues with Tom Duncan

Immediate annuities: frequently asked questions with Desiree Buckner

Executive bonus plans with Allison Anne Hoyt

10 big annuity mistakes Part 2 with Ken Boothe

Qualified opportunity funds with Ryan Patton

Asset protection planning with Allison Anne Hoyt

ACGpapers

ACGpresentations

6

Ask the specialist

Including health savings accounts as a retirement planning tool

George W. Schein, JDDirector, Advanced Consulting Group

What are qualifying medical expenses that can be reimbursed on a tax-free basis using an HSA?

The IRS defines qualified medical expenses to generally include the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.1 Transportation costs primarily for, and essential to, medical care may also qualify as medical expenses, as do amounts paid for qualified long-term care

services, and limited amounts paid for long-term care insurance contract premiums.2 This description is quite broad and includes many medical, prescription drug, dental, and vision related expenses. However, note that one limitation to qualified medical expenses is that they must be primarily to alleviate or prevent a physical or mental disability or illness. Expenses that benefit general health and wellbeing, such as dietary supplements or membership at a local gym, are not generally considered qualified medical expenses.3

Why are HSAs important for financial advisors to understand?

First off, HSAs are an additional tool to help your clients reduce their income tax burden. Secondly, healthcare costs are rising faster than both wages and inflation, which has been the case for quite a few years. This negatively impacts long-term savings for retirement. Furthermore, rising healthcare costs mean a larger proportion of an individual’s retirement savings will ultimately be spent on future medical expenses. In fact, one recent study found that a couple retiring today may very well need up to $400,000 to pay for healthcare costs throughout the remainder of their retirement.4 You need to be able to help your clients plan for and address this reality.

How do HSAs help employers and employees reduce taxes?

Employee contributions made to their individual HSAs that are facilitated by their employer via payroll deductions through a Code Section 125 cafeteria plan are not subject to federal (or state, if applicable) income tax or FICA tax. Employers also realize tax savings here, because they also do not have to pay their share of FICA tax on those pre-tax employee contributions. In addition, an employer can deduct as a business expense their own employer contribution to their employees’ individual HSAs, which further reduces the employer’s own income subject to taxation.

How do HSAs help individuals save for retirement?

HSAs are an additional tool to help save for retirement because of the unique “triple-tax free” status granted them by the Internal Revenue Code. Contributions (up to the legal limit, which is adjusted annually) (1) go into an HSA on a tax-free basis, (2) where they can be invested and grow over the years tax-free, and (3) the eventual distributions to pay for qualified medical expenses will be tax free.

Another option for an HSA-eligible individual, particularly one who is healthy and has more discretionary income, is to pay for current medical expenses out-of-pocket and save current income into his or her HSA on a tax-free basis. He or she can then invest that money and let it grow within the HSA on a tax-free basis, and then (1) use future distributions from that HSA to reimburse him/herself for past qualified medical expenses paid out-of-pocket or (2) pay for future qualified medical expenses during retirement.

Finally, it is important to note that once individuals reach age 65, they are also permitted to take distributions from their HSA for non-medical expenses without any tax penalty. Such a distribution would be subject to regular income tax rates similar to a distribution from a traditional 401(k) plan or traditional IRA.

1 I.R.C. 213(d)(1)2 Id.3 IRS Publication 502 (2018).4 “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $400,000, Up From $370,000 in 2017” – EBRI, October 8, 2018.

7

Behind the insightAllison Anne Hoyt, JD, CLU®Director, Advanced Consulting Group

Connect with Allisonlinkedin click hereemail hoyta5@nationwide.comphone (614) 249-0211

Allison joined Nationwide’s Advanced Consulting Group in 2018 after six years with the advanced sales team at a mutual life insurance company in New York City.

She helps position life insurance, annuities, and other financial products in the financial plans of individuals, businesses, and charitable organizations and has

a particular interest in charitable planning, sophisticated wealth transfer (i.e. estate planning) for U.S. persons and for foreign nationals, split dollar life insurance strategies, and business succession planning.

A former NCAA Division II college athlete (volleyball and softball), Allison now enjoys playing competitive beach volleyball. She lives in downtown Columbus, Ohio.

Dee Dee Chadwick, JD, MSMSenior Director, Advanced Consulting Group

Congress seems to be in agreement that Americans are not saving enough to provide for a secure retirement.

This spring we’ve watched closely as both houses of Congress considered various pieces of legislation. Many of those had common themes, including provisions dealing with multiple employer plans (“MEPs”) and pooled employer plans (“PEPs”). Now we know with certainty

which proposed piece of legislation has wide support.

The House of Representatives has nearly unanimously passed the SECURE Act of 2019 (H.R. 1994). It is designed to enhance retirement plan coverage and security, and includes provisions addressing lifetime income disclosure, annuity portability, open MEPs, and an increase in the required beginning date for distributions from age 70½ to age 72.

The action now moves to the Senate where they will either vote on the SECURE Act as constituted, rewrite it, or turn their attention to a different piece of legislation all together.

For more detail on this we invite you to read the recent ACG white paper, An update on current developments affecting retirement plans, (NFM-18511AO), by ACG director Chuck Rolph. In this white paper, Chuck highlights recent ERISA litigation and lawsuits involving 403(b) plans and other types of retirement plans, a surge of employer interest to add features in their own 401(k) plans, and developments with state law, the Department of Labor, the SEC and the IRS.

You can count on the Advanced Consulting Group to stay up to the minute on any upcoming changes to retirement plans with more papers, podcasts, and bulletins as we move forward.

Change is in the air with retirement plans

Preparing for an effective LTC conversation

with clients Tips for having meaningful long-term care

talks with clients that can educate and potentially lead to a sale.

9

Preparing for an effective LTC conversation with clientsShawn Britt, CLU®, CLTCDirector, Long-term care initiatives, Advanced Consulting Group

What is the best way to sell long-term care (LTC) products? You don’t sell product, or start a LTC conversation, touting the value of having LTC coverage. You may find more success by discussing the importance of planning for such an event, and the consequences that could follow if there is no plan in place. Your goal is to be a “problem solver,” not a sales person. Once the client sees the need for LTC planning, that will lead to a need to fund their own LTC plan. You can then show your client funding options (products) for LTC that provides a “win-win” outcome. But first, let’s look at a few things to remember when becoming an LTC planner.

Analyzing prospectsLTC prospects can be categorized into three groups; and each group will require a different type of discussion.

1. The Unqualifiable — those knocking down your door to buy because they are close to needing care (and won’t qualify).

2. The Caregiver — those who have dealt with a family member needing care and have dealt with the consequences of that family member not having a plan.

3. The Non-Planner — those who don’t believe they will need care, will self-insure if they do — and have no strategy in place in the event their fate includes needing LTC.

We will drill down on each group and how to handle a conversation.

Nationwide CareMatters® IINationwide CareMatters II, a new linked benefit product that offers more accessibility to purchase the policy and expanded features to help pay for care, is now available. CareMatters II is LTC coverage linked to a universal life insurance policy, so benefits are paid whether LTC is needed or not. CareMatters II offers cash indemnity long-term care benefits with no restrictions from Nationwide on how LTC benefits are used, giving clients freedom and peace of mind.

The new and expanded features of CareMatters II include:• Expanded premium

schedules — Single premium — 5-year and 10-year premium schedules, pay to attained age 65 and pay to attained age 100. All multi-year schedules can be paid either annually or monthly.

• Inflation benefits — 3% simple, 3% compound, 5% compound, and U.S Medical Care Inflation that follows the medical component of the CPI as tracked by the U.S. Bureau of Labor Statistics and the U.S. Department of Labor

• Structured with separate identifiable LTC premiums that may enable policy owners to use HSA dollars to pay for the LTC premiums

• A 90-calendar day retroactive elimination period. Benefits for first 90 days pay with month four benefits

• Three refund of premium (ROP) options that provide liquidity if needed

LTC sales are not transactional. The sale will likely take a few appointments with a box of tissue on the side (as personal stories may be told).

Statistics don’t work. It’s not about the risk, it’s about the consequences. Center the discussion around what would happen if no plan was in place.

Women generally drive the LTC sale. Try to have her speak first about her concerns so she is not in the position of contradicting her husband.

Women buy LTC, men buy returns. Have a toolbox of funding solutions ready to meet each need when the discussion evolves to the funding stage.

10

Clients wanting LTC coverage when they will not qualifyUnfortunately, there are still too many clients who believe the time to buy coverage is right before you need LTC services. These people will likely not qualify for LTC coverage, thus other solutions will need to be discussed. For example, if the spouse is still insurable, the purchase of life insurance with a cash indemnity LTC rider can provide some help in such a situation:

It’s not a perfect solution, but better than no solution; and still covers several circumstances that could occur.

Clients with caregiving experiencePeople who have had an LTC experience with a family member understand the results of not planning for LTC. The client or members of the client’s family may

have experienced some of the consequences of being a caregiver such as lost income due to reduced hours at work, physical and emotional problems, or even family dissention. The client may even approach you first about LTC planning. Thus, for these clients, it is more of a matter of revisiting the consequences that were experienced and then discussing the right LTC funding solution that meets their potential care needs, their budget, and their total financial picture.

Having conversations with clients who resist LTC planningThe rest of this article will be devoted to the third category of client — those who don’t believe they will ever need care, plan to self-insure, have misconceptions that the government pays for LTC, or all the above.

The subject of LTC will often be one of the hardest conversations you will have with your clients. To find more success, you may need to change the approach you have been using.

Opening the conversationThe first mistake advisors make is using the words “long-term care” in the initial opening of the conversation. Many people view “long-term care” as a stay in a nursing home, so your discussion may likely end before it gets started. Start with something like, “Let’s look at how we can fund keeping you in your home longer should you start to need some help.” Keep the focus on home. Over half of LTC claims begin as home health care claims,1 so this approach makes sense. Then you can transition your phrasing to “extended care needs.” Only when the discussion hits the point of funding the plan you have discussed do you transition to the term “long-term care,” since that is what funding solutions you may suggest are called.

Straightening out misconceptionsUnfortunately, your clients may be armed with inaccurate information about LTC. The chart on the following page shows some of the most common misconceptions clients have regarding how LTC can be paid for, and the limitations of each.

The life insurance can serve as a “key caregiver” policy. In the event of an untimely death of the healthy spouse — who was counted on to provide care for the uninsurable spouse — the death benefit will

provide funds to pay for the care of the uninsurable spouse left behind.

If the insurable spouse goes on a LTC claim, full indemnity benefits are paid, and can be used to pay

for the care of both spouses. Keep in mind that the LTC benefit can only be used for the uninsured

spouse if the insured spouse is on LTC claim and collecting benefits.

11

Self-insure• Possible for the

wealthy

• Not cost efficient

• For ultra high net worth, but may not result in the best estate planning

Medicaid• Must meet low in-

come and asset qualifications

• Less than $2,000 in countable assets

• Nusing home often only choice of care

Health insurance

• Covers illness and injury, not LTC

• Medi-gap may cover Medicare co-pay but not cost of care

• ACA does not cover LTC

Medicare• If you can qualify,

maximum of 100 days

• Only first 20 days fully covered

• Significant co-pay days 21-100

Once you have educated the client on the facts of what will not fund LTC, it is time to start discussing why having an LTC plan is important.

Laying out the consequences of having no planHaving a strategy in place is the most important part of LTC planning. The clients who believe care is in their future will fall into place and are not your primary challenge, though there will be times when the following strategies will be needed. Remember, we are now primarily talking about clients that don’t believe they will need care, and that is more likely to be men. The challenge is to agree with the client (which helps disarm them), then show the client the consequences of not having a plan in place should they be wrong. The following is an example of a conversation that lays out the consequences of not planning:

“You’re right Mr. Smith. You probably won’t have a need for extended care, but what if you do? How will you pay for it?”

Client answer: “I’ll use my assets; I have plenty of money.”

“Well…, that could work if market timing cooperates, but over the years you’ve experienced a few big downturns in the markel — 2001, 2008, and remember “Black Friday”? What if an extended care need happens when your portfolio is suffering a major downturn?”

Client answer: “My kids can take care of me; I have done plenty for them so now they can return the favor.”

“OK, as I recall, you have three children — two sons and one daughter. Will they all be helping?”

Client answer: “Mostly my daughter, I suppose.”

“Who will handle your money and make decisions about your care?”

Client answer: “I will of course.”

“You may not have a choice…… you may not be able to make decisions at some point, and you may have to give up control”.

Client sighs.

“How do you think your daughter will feel in time when she isn’t getting help from her brothers? And what if your sons don’t like the decisions your daughter is making? Can you see where this could lead to dissension among your children?”

Client nods yes.

“The best gift you can give your kids is a plan to handle your extended care needs should they arise, with your wishes laid out, and with a planned stream of funds that are not impacted by how the market is treating your portfolio.”

12

Funding a plan vs. selling a policyNow that you have laid out the consequences of not having a plan, and showed the importance of dedicated funding that is not tied to the market, you can discuss how to create an income stream.

That’s where LTC coverage solutions come into play. The goal is to create a “win-win” solution. Even though this client may never need care (which is what they believe), you are suggesting solutions to pay for care that help protect the portfolio from being dipped into during a market downturn by providing a stream of funds that are not subject to market risk, and will pay benefits at death if LTC is never needed. This source of funds along with a plan that is communicated to loved ones will help protect the family from discourse and disagreements should care be needed.

Solutions that can provide such a win-win solution may include:

• life insurance with a LTC rider, or• linked benefit LTC coverage.

Consider these talking points when showing solutions:

• “This solution creates a non-correlated asset in your portfolio that will not be subject to market

downturn. You can’t grow the money back that you’ve withdrawn. This solution allows your portfolio the chance to rebound should the market go south during an extended care need.”

• “This solution pays LTC benefits by cash indemnity. That means you can have the same flexibility on how to spend your funds on care needs as you would have had by self-insuring – and with dedicated funding ready to go whenever the need arises.”

• “You can self-insure the old-fashioned way, or ‘self-assure’ — which is a way to insure with your own funds, but create a ‘stop loss’ of sorts. When LTC benefits are paid, the premium you paid to purchase your LTC coverage is used first, then the leveraged amount kicks in to pay benefits — creating a ‘stop loss’ — and protecting your assets up to the leveraged amount. If you never need care, your estate will get at least what you paid for the policy if not more.”

First showing clients the need for LTC planning, then creating awareness of the consequences that may arise from lack of a plan, better equips the client to see the need for efficient funding of LTC.

1 The American Association of Long Term Care Insurance, AALTCI Sourcebook, 2015-2016

LTC planning can be for every wealth class. However, you must tailor your conversation around the consequences of planning so that it meets each specific wealth class. You can then offer the

appropriate funding solutions. See the white paper, “The Four Tiers of Long-term Care Clients”, NFM-16530AO, for further details.

Create income using deferred annuity to immediate annuity partial exchanges

Insight into how individuals with in-force deferred annuities now have a significant

income generating opportunity.

14

Create income using deferred annuity to immediate annuity partial exchangesThomas H. Duncan, JD, CLU®, ChFC®Senior Director, Advanced Consulting Group

With the publication of Revenue Ruling 2011-38 the Internal Revenue Service (IRS) now permits the owner of a deferred annuity to exchange a portion of the deferred contract into an immediate annuity product and then use an exclusion ratio on the payments from the immediate annuity to compute the taxable income component of those payments. This rule change opens significant income/cashflow generating opportunities for those clients with in-force deferred annuities, particularly those with significant gains.

Let’s look at an example of how this new strategy would work.

Jim is 75-years-old and has a fixed deferred annuity with $100,000 of cash value, which is composed of $70,000 of investment in the contract (we will call investment in the contract cost basis in the remainder of the paper for ease of discussion) and $30,000 of gain. Jim needs an additional $250 a month to cover his increasing health care expenses like prescription drugs costs and physical therapy treatments. Jim has earmarked this fixed deferred annuity as the source of funds for his additional income needs, but he’d like to do this in as income tax efficient manner as possible and have some liquidity to cover unforeseen or emergency needs.

If Jim were to take withdrawals from this deferred annuity, then all the gain comes out first before accessing cost basis. At $250 a month ($3,000 a year) it would take Jim over 10 years (with or without additional growth) before he would access the cost basis of the contract. However, he would have total liquidity with this option as all the money remains in the deferred annuity.

Instead, what if Jim used the rules permitting partial exchanges from deferred annuities into immediate annuities to create the additional income he needs. This technique would result in less income tax

paid initially because of exclusion ratio treatment on payments from immediate annuities versus withdrawals from the deferred annuity which come from gains first, and it would give him some liquidity because of the remaining amount left in the source deferred annuity.

Jim decides to exchange a portion of his deferred annuity into a single premium immediate annuity to generate the additional $250 a month he needs. He chooses a life with cash refund payout option to ensure that he and/or his beneficiary receive back at least his initial purchase premium.

To generate $250 a month for the rest of his life Jim needs to exchange $38,717.761 from his deferred annuity into this new immediate annuity product. The purchase amount is made of $27,102.43 of cost basis and $11,615.33 of gain. These amounts are based on the ratio as they exist in the current deferred annuity – here 70% cost basis and 30% gain. The annual exclusion amount is $1,691.16, meaning that of Jim’s $3,000 annual annuity payments, $1,308.84 is taxable. This compares favorably to taking withdrawals from the deferred annuity, where all the gains came first. It also leaves $61,282.24 in the deferred annuity for Jim to access when he needs it for unforeseen and/or emergency needs.

As you can see, undertaking a partial exchange from a deferred annuity into an immediate annuity helped Jim create the income he needed in a more tax efficient way, left him some liquidity, guaranteed that he would never outlive that payment amount and if he dies prior to receiving back his purchase amount that his beneficiaries would collect the remainder. A complete solution to a simple income need and it’s a planning technique that wasn’t available prior to 2011.

There are some things to keep in mind if you’re implementing the strategy.

15

First, if the income start date on the immediate annuity is within 180 of the partial exchange, the payout method must be either life based (any life based option will do) or if a term certain only option is used, then the term must be for ten years or more to avoid the payments becoming potentially fully taxable through aggregation back to the full gain amount from the original deferred annuity.

Second, no withdrawals should be taken from the source deferred annuity contract for 180 days after the partial exchange to avoid those withdrawals becoming potentially fully taxable through aggregation back to the full gain amount from the original deferred annuity.

Third, if the annuity owner is under age 59½ the immediate annuity payment must be either life based or a term certain equal to life expectancy to avoid the application of the 10% tax penalty for premature distributions of the gain portion of annuity payments received prior to age 59½.

This rule opens a significant new source of assets for advisors to tap to create income through annuitization. No longer is annuitization of an in-force

deferred annuity a choice between 0% and 100%. Now clients may choose to exchange any percentage of their deferred annuity into an immediate annuity to generate the income they need, while still preserving liquidity to help them feel comfortable that they can cover unforeseen needs through the money remaining in the source deferred annuity.

This is a hypothetical example and is not intended to predict or project investment results of any specific investment. Investment return is not guaranteed and will vary depending upon your investments and market experience. Assumptions do not include fees and expenses. If fees were reflected, the return would be less.

Please keep in mind that annuities have limitations. They are long term vehicles designed for retirement purposes. They are not intended to replace emergency funds, to be used as income for day-to-day expenses, or to fund short- term savings goals.

This rule opens a significant new source of assets for advisors

to tap to create income through annuitization.

No longer is annuitization of an in-force deferred annuity a choice between 0%

and 100%.

*

1 Rates as of 5/3/18

It’s nonqualified — Why should I care about

ERISA? An analysis of the intersection of nonqualified pension and welfare

benefit plans and ERISA.

17

It’s nonqualified — Why should I care about ERISA?Anne L. Meagher, JD, CLU®, ChFC®Director, Advanced Consulting Group

Many of the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), that apply to tax-qualified retirement plans and welfare benefit plans, do not apply to “nonqualified” plans that cover only a select group of employees. However, even for these plans, practitioners need to be aware of when and how ERISA applies.

This paper will analyze the intersection between nonqualified pension and welfare benefit plans of for-profit entities and ERISA.

ERISA; the basicsLet’s start with some definitions.

A welfare benefit plan means any plan, fund, or program established or maintained by an employer for the purpose of providing its participants or their beneficiaries, through the purchase of insurance or otherwise,

• medical or hospital care or benefits;• benefits in the event of sickness, accident,

disability, death or unemployment;• vacation benefits;• apprenticeship or other training programs;• day care centers;• scholarship fund; or• prepaid legal services.1

In general, a pension plan (or pension benefit plan) means any plan, fund, or program established or maintained by an employer that, by its express terms or as a result of surrounding circumstances, provides retirement income to employees, or results

in a deferral of income by employees for periods extending to the termination of covered employment or beyond.2

When referring to either a welfare plan or pension plan, or to both types of plans, ERISA refers to them as an “employee benefit plan.”

Title I of ERISA includes provisions relating to the following:

• Part 1: Reporting and disclosure• Part 2: Participation and vesting• Part 3: Funding• Part 4: Fiduciary responsibility• Part 5: Administration and enforcement

Tax-qualified plans such as profit sharing, 401(k), and cash balance plans under Internal Revenue Code (“Code”) §401(a) are subject to Title I of ERISA if the plan is established or maintained by any employer engaged in commerce or in any industry or activity affecting commerce; or by an employee organization representing employees engaged in commerce.3 However, if a pension benefit plan is unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees it is referred to as a nonqualified deferred compensation (NQDC) plan and will be exempt from some ERISA requirements.4

When an employee benefit plan is only for a select group of management or highly compensated employees is it referred to as a “top-hat” plan.

18

Here is a chart that shows which provisions of Title I of ERISA apply to welfare benefit plans and NQDC plans. Each is discussed in detail below.

Welfare Benefit Plans NQDC Plans

ERISA provision Top-Hat Fewer than 100 participants

100 or more participants Top-hat

Reporting and disclosure Limited Limited Full compliance Limited

Participation and vesting Exempt

Funding Exempt Exempt Exempt Exempt

Fiduciary responsibilty Full compliance Exempt

Administration and enforcement Full compliance

Reporting and disclosureWelfare benefit plans

Top-hat plans (Limited exemption)Welfare plans that provide benefits that are paid as needed solely from the general assets of the employer or are provided exclusively through insurance contracts/policies, the premiums for which are paid directly by the employer from its general assets for a top-hat group of employees, will be exempt from the reporting and disclosure requirements, except for the requirement to provide plan documents to the U.S. Secretary of Labor upon request.5

Fewer than 100 participants (Limited exemption) A welfare benefit plan with fewer than 100 participants, that either provides benefits paid from the general assets of the employer or through insurance policies paid at least partly (or wholly) by the employer and which may be paid partly through employees’ contributions, need not file an annual report (Form 5500 series).6 However, the employer must furnish a Summary Plan Description to each participant and beneficiary of the plan.7

100 or more participants (Must be in full compliance)A welfare benefit plan with 100 or more participants must file the annual report (Form 5500) and comply with all the reporting and disclosure requirements of Part 1, Title I of ERISA unless some other exemption exists (e.g., governmental and church plans.)

NQDC plans

To comply with the reporting and disclosure duties, NQDC plans must file a statement with the U.S. Department of Labor (DOL).8 The DOL permits this alternative method of compliance to be submitted electronically on the DOL website. An employer will

have to create a new filing when a new arrangement or plan that constitutes a separate plan is adopted. A new filing is not required if a plan is amended to include a separate class of participants.9

Participation and vestingWelfare benefit plans and top-hat NQDC plans are exempt from the participation and vesting requirements of ERISA.10 In fact, top-hat plans must discriminate in favor of highly-compensated employees and can have any type of vesting applied to employer contributions that an employer desires.

FundingThree types of plans are exempt from ERISA’s funding requirement:1. Welfare benefit plans;2. Insurance contract plans; and3. Top-hat NQDC plans.11

Fiduciary responsibilityWelfare benefit plans

All welfare benefit plans (including top-hat plans) are subject to the fiduciary responsibility rules of ERISA. This means that there must be a written plan document that provides for one or more named fiduciaries.12 In addition, each plan must

• Provide a procedure for establishing and carrying out a funding policy;

• Describe any procedure for the allocation of responsibilities for the operation and administration of the plan;

• Provide a procedure for amending the plan, and for identifying the persons who have the authority to amend it; and

19

• Specify the basis on which payments are made to and from the plan.13

NQDC plans

Top-hat NQDC plans are not subject to the fiduciary responsibility rules of ERISA.14

Administration and enforcementAll welfare benefit plans and pension benefit plans, including top-hat NQDC plans, are subject to the administration and enforcement rules under Part 5, Title I of ERISA. This is important because it means that an employer who sponsors a welfare plan or a NQDC plan can be sued by many parties, including a participant, beneficiary, and the U.S. Department of Labor, to recover benefits due, to enforce rights under the terms of the plan or to clarify rights to future benefits.15 In addition, criminal penalties can be ordered for any person who willfully violates any provision of Part 1 (reporting and disclosure).16

All plans must provide written notice to each participant and beneficiary of the claims procedure that must be followed in the event a claim for a benefit is denied.17 The regulations under this section provide detailed instructions as to what the claims procedures must state and set out a timeframe for appealing a denied claim.

Identifying the top-hat groupERISA and its regulations do not specify who should (or can) be included in the top-hat group. The U.S. circuit courts are not all in agreement as to what tests should be applied to determine whether a plan is limited to the appropriate employees. The Second, Sixth and Ninth Circuits agree that a plan will be a top-hat plan if it is (1) unfunded; (2) maintained primarily for a select group of management or highly compensated employees; and (3) the select group test is whether the members of the group have positions with the employer of such influence that they can protect their [benefits] by direct negotiations with the employer.18 The First and Third Circuits, on the other hand, do not require a showing that the “select group” has bargaining power to affect their benefits.19 In a 2017 case out of the Third Circuit, the court said that the “select group” element has both “quantitative and qualitative

restrictions.”20 This means that the plan must cover relatively few employees (the quantitative test) and only high-level employees (the qualitative test). The court further stated that, although the Second, Sixth and Ninth Circuits “have inquired into plan participants’ bargaining power, those decisions do not clearly adopt bargaining power as an additional requirement.”

Ultimately, the question as to whether a plan is a top-hat plan is a facts and circumstances analysis. The DOL does not investigate, and the issue usually only arises when an employee, or more likely, a former employee sues an employer for benefits he or she thought she was entitled to but didn’t receive.

The executive bonus plan: does ERISA apply?One popular method used by employers to provide supplemental benefits to a key employee is to increase the employee’s compensation and pay that additional amount into a cash value life insurance contract that is owned by the employee. Usually, the employer facilitates the acquisition of the policy and pays the premium directly to the insurance company. Is this an ERISA welfare benefit plan?

In a 2017 Sixth Circuit case, the court outlined the steps for determining whether a death benefit only plan for a top-hat group was an ERISA welfare benefit plan.21 To qualify as a welfare benefit plan, the “agreement, fund or program” must satisfy each prong of the four-part Dillingham test as discussed in the Eleventh Circuit case, Donovan v. Dillingham (1982).22 Under the Dillingham test, a “plan, fund or program” under ERISA is established if, from the surrounding circumstances, a reasonable person can ascertain

1. The intended benefits;2. The class of beneficiaries;3. The source of financing; and4. The procedures for receiving benefits.23

In the Sixth Circuit case there was no written plan document, and the court looked to these four Dillingham factors to determine if the arrangement constituted an ERISA welfare benefit plan. Dillingham has been cited in many cases in which courts have adopted this analysis.24 The facts of each case, whether one party to the suit has “unclean hands,” and various other factors are also weighed by the courts in deciding these cases.

20

ERISA regulations state that ERISA will not govern if the plan meets these safe harbor requirements:

• An employer does not contribute to the policy; • Participation in the plan is completely voluntary

on the part of the employees;• The sole function of the employer is to collect

premiums through payroll deductions and remit them to the insurer; and

• The employer receives no consideration in the form of cash or otherwise in connection with the policy….”25

Other life insurance benefit plansBased on the safe harbor requirements, it appears that an economic benefit (endorsement) split dollar life insurance arrangement would be considered a welfare benefit plan and subject to ERISA.

On the other hand, a loan regime split dollar life insurance arrangement where the employee is the policy owner, and the other three criteria listed above are met, is likely not subject to ERISA.

ConclusionQuite often the judges and the attorneys trying cases that involve benefit plans that may (or may not) be subject to ERISA are not well-versed in the complexities (and vagaries) of ERISA. This lack of certainty in the reasoning and analysis that a court will apply in any given case should cause employers and their legal counsel to determine whether, in the event of a lawsuit, they would want ERISA or state law to apply, and then design a compensatory or benefit plan accordingly.

1 The American Association of Long Term Care Insurance, AALTCI Sourcebook, 2015-20162 ERISA §3(2)(A)3 ERISA §4(a)4 ERISA §201(1) and (2)5 29 CFR 2520.104-24(a)6 29 CFR 2520.104-20(a)7 29 CFR 2520.104-20(c)8 29 CFR 2520.104-23(a)9 www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/e-file/tophat-plan-filing-instructions10 ERISA §201(1) and (2)11 ERISA §301(a)(1), (2) and (3)12 ERISA §402(a)(1)13 ERISA §402(b)14 ERISA §401(a)(1)15 ERISA §502(a)16 ERISA §501(a)17 ERISA §50318 Browe et al v. CTC Corporation et al, Case No. 2:15-cv-267 (U.S. Dist. Ct., D. Vermont, 2018), citing Demery v. Extebank Deferred Comp. Plan (B), 216 F.3d 283 (2d Cir. 2000)19 Sikora v. UPMC Health System, 876 F.3d 110 (3d Cir. 2017)20 Id., citing In re New Valley Corp., 89 F.3d 143 (3d Cir. 1996)21 Wolf v. Causley Trucking, Inc., No. 17-1683 (6th Cir. 2017)22 Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en banc)23 Wolf v. Causley citing Donovan v. Dillingham24 See for example: Woerner v. FRAM Group Operations, LLC, Court of Appeals, 3rd Cir. 2016, Shaver v. Siemens Corp., 670 F.3d 462 (3d Cir. 2012).25 29 CFR 2510.3-1(j)

What’s new in the 2018 Farm Bill

A brief rundown and callouts from the Agriculture Improvement Act of 2018

including a reclassification of hemp.

22

What’s new in the 2018 Farm BillRyan Patton, JD, MBAConsultant, Advanced Consulting Group

The Agriculture Improvement Act of 2018,1 also known as the Farm Bill, was signed into law on December 20, 2018, enacting its provisions for roughly the next five years. Over that time, baseline spending, projected at roughly $428 billion2 by the Congressional Budget Office, will be allocated via twelve sections of the law, or titles. Over three-quarters (76.5%) of this funding will be distributed to food and nutrition assistance programs at roughly $326 billion.3 The next largest disbursements are alloted to crop insurance (9%), commodities (7%) and conservation (7%).

Through the Farm Services Agency (FSA) under the United States Department of Agriculture (USDA), programs such as Agriculture Risk Coverage (ARC), Price Loss Coverage (PLC), and Dairy Margin Coverage (DMC) receive mandatory funding. Roughly $99 billion,4 or 23% of the spending will go to these programs. With net farm income projected to drop by 12% for 2018,5 the funding of these programs is expected to be well received. Let’s look at the major updates within the Farm Bill and the programs affected.

Program extensions and electionsSeveral key programs have been reauthorized by the 2018 Farm Bill; Price Loss Coverage (PLC), Agriculture Risk Coverage County (ARC-co), and Agriculture Risk Coverage Individual (ARC-i).

Under both of the ARC programs, farmers will continue to be provided payments when actual crop revenue falls below 86% of benchmark revenue.6 Payments under these programs are based on the payment rate of the county where the base acres are physically located. Improvements have been made to the ARC-co program. First, the Secretary is to establish guarantees for irrigated and non-irrigated yields in each county. Also, when actual yields drop below 80% (previously 70%) of the transition yield for the county, Risk Management Agency7 data will be consulted by the FSA for transitional yield to ensure those figures are reflective of recent yields within the county. The USDA is also required under the bill to publish the payment rate for each county no later than 30 days after the end of each 12-month marketing year for each of the covered commodities.

The PLC program is slightly different as it provides assistance to farmers when the market price for a covered commodity falls below a statutory reference price. The PLC payment rate is the difference between the effective reference price8 and the effective price. The effective reference price is new and defined as the lesser of: (1) 115% of the reference price or (2) the greater of: (a) 85% of the Olympic average of the five most recent marketing-year average crop prices or (b) the reference price. Under this methodology the reference prices have potential to increase as the market conditions improve. Lastly, the bill allows a one-time opportunity to update payment yield used to calculate any PLC payment for each covered commodity on the farm for the 2020 crop year.

The 12 titles in the Farm Bill

1. Commodities2. Conservation3. Trade4. Nutrition5. Credit6. Rural Development7. Research, Extension,

and Related Matters8. Forestry9. Energy10. Specialty Crops &

Horticulture11. Crop Insurance12. Miscellaneous

*

23

These programs require farmers to make a new five-year election to receive PLC or ARC-co on a commodity-by-commodity basis or ARC-I for all commodities. If a farmer fails to make a unanimous election, coverage will be waived for 2019 and the farmer shall be deemed to have elected the same coverage as he/she had previously elected for 2015-2018 going forward for years 2020-2023. New under the Farm Bill, farmers will now have the option beginning in 2021 to make an annual decision between ARC and PLC programs on a crop-by-crop and farm-by-farm basis.

Actively engaged in farming adds some new twistsA farmer or rancher’s eligibility to qualify for farm program payments depends on his/her ability to meet the “active participation” in farming requirements. In 2014, limits were placed on the number of non-family members who are eligible to qualify as farm managers for program payment purposes. However, no limitation applied to qualifying family members. The Farm Bill bill expanded the definition of “family member” to now include nieces, nephews, and first cousins.9 This expansion helps to serve those individuals who do not necessarily have a direct family of their own but have extended family assisting in their operations.

The payment limitation carries forward from the 2014 farm bill with regard to the eligible amount for individuals and entities, which is set at $125,000 (with the exception of peanuts). Average adjusted gross income (AGI) limits also continue to limit eligibility to individuals and entities with less than $900,000 in AGI. As with the 2014 farm bill, planning needs to be considered when structuring a farming operation to maximize PLC or ARC payments.

A new recognized commodityA largely discussed provision within the Farm Bill is the recognition of hemp production as an agricultural commodity. The Farm Bill reverses it’s status as a controlled substance and legalizes industrial hemp production. Hemp production can be used for multiple applications including food, textiles, personal care, and more. The hemp industry is expected to bring in more than one billion dollars in sales for 2019.10 As this industry continues to grow further regulations will certainly come with that growth, but for now it is a crop to watch.

1 Pub. L. No. 115-3342 Congressional Budget Office April 2018 Baseline, 2018 Farm Bill, Farm Bureau Analysis3 Id.4 Id.5 USDA, Economic Research Service, Hightlights from the March 2019 Farm Income Forecast; https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/highlights-from-the-farm-income-forecast/6 I.R.C. Sec. 72(q)7 H.R. 46548 Pub. L. No. 115-334, Sec. 11019 Pub. L. No. 115-334, Sec. 1703(a)(1)(B)10 https://www.fb.org/market-intel/2018-farm-bill-provides-a-path-forward-for-industrial-hemp

Utilizing retirement plan contributions to maximize

the IRC 199A deduction How a contribution deduction to a

qualifiied retirement plan may allow for IRC 199A deductions.

25

Utilizing retirement plan contributions to maximize the Internal Revenue Code (“IRC”) 199A deductionChuck Rolph, JD, MSFS, CFP®, AIF®Director, Advanced Consulting Group

The 2017 tax act1, commonly referred to in the popular press as the “Tax Cuts and Jobs Act” or “TCJA,” added a provision for tax years beginning after December 31, 2017 (i.e., IRC 199A deduction) that allows taxpayers other than C corporations (i.e., sole proprietorships, partnerships, limited liability companies, and S corporations) with pass-through income to deduct 20% of their qualified business income or “QBI.”2 We will discuss the limitations that apply to the general rule and describe how a proper and timely utilization of a deduction for a contribution made to a qualified retirement plan [IRC 401(a)] or an IRA-based plan such as a Savings Incentive Match Plan for Employees (“SIMPLE”) or a Simplified Employee Pension (“SEP”) (hereinafter collectively referred to as “plan” or “plans”) might allow a business owner with pass-through income to take full advantage of the IRC 199A deduction for the QBI by reducing his or her taxable income below the threshold amount.

Allowance of the IRC 199A deductionEffect of the IRC 199A deduction. The IRC 199A deduction reduces taxable income and is not allowed in computing adjusted gross income.3 Taxpayers are eligible for the IRC 199A deduction regardless of whether they itemize their deductions, as the deduction is taken after the taxpayer’s adjusted gross income is computed.4

Amount of the IRC 199A deduction. The amount of the IRC 199A deduction is equal to the lesser of: (i) the taxpayer’s combined QBI amount; or (ii) an amount equal to 20% of the excess (if any) of (A) the taxable income of the taxpayer, over (B) the net capital gain of the taxpayer.5 The determination of the combined QBI

amount is determined as the sum of the deductible amounts for each trade or business of the taxpayer.6

Some relevant termsThe following are some defined terms that are relevant to the discussion of the applicability of the IRC 199A deduction.

Applicable percentage — With respect to any taxable year, 100% reduced (not below zero) by the percentage equal to the ratio that the taxable income of the individual for the taxable year in excess of the threshold amount, bears to $50,000 (or $100,000 in the case of a joint return).7

Qualified business income (“QBI”) — the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business (or aggregated trade or business) as determined under the rules of 26 C.F.R. 1.199A-3(b). For purposes of IRC 199A only, the deduction for contributions to qualified retirement plans under IRC 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business.8

Phase-in range — A range of taxable income between the threshold amount and the threshold amount plus $50,000 (or $100,000 in the case of a joint return).9 For 2019, taking into account the cost-of-living adjustments, the phase-in range for a single individual is from $160,700 to $210,700; for a taxpayer whose status is married filing jointly, the phase-in range is $321,400 to $421,400.

26

Specified service trade or business (“SSTB”) — A specified service trade or business as defined in 26 C.F.R. 1.199A-5(b). Without going into the degree of detail contained in the regulations, the listed SSTBs include any trade or business involving the performance of services in one or more of the following fields: (i) health; (ii) law; (iii) accounting; (iv) actuarial science; (v) performing arts; (vi) consulting; (vii) athletics; (viii) financial services; (ix) brokerage services; (x) investing and investment management; (xi) trading; (xii) dealing in securities; and (xiii) any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

Threshold amount — For any taxable year beginning before 2019, $157,500 (or $315,000 in the case of a taxpayer filing a joint return).10 In the case of any taxable year beginning after 2018, the threshold amount is the dollar amount in the preceding sentence increased by an amount equal to such dollar amount, multiplied by the cost-of-living adjustment determined under IRC 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2016” in IRC 1(f)(3)(A)(ii). The amount of any increase under the preceding sentence is rounded as provided in IRC 1(f)(7). For 2019, the $157,500 amount has been increased to $160,700, and the $315,000 amount has been increased to $321,400.11

Computation of the IRC 199A deduction for individuals with taxable income not exceeding the threshold amountIn general. For individuals whose taxable income does not exceed the threshold amount, the IRC 199A deduction is the lesser of 20% of the total QBI or 20% of the amount by which the individual’s taxable income exceeds net capital gain.12

Observations. In the case where a taxpayer’s taxable income is below the threshold amount, it does not make any difference whether the taxpayer has income from an SSTB or whether the affected business has paid sufficient wages to avoid application of the W-2 wage limitation. If the taxpayer’s taxable income is below the threshold amount without taking into account any deduction for contributions made to a plan, it will not be necessary for the taxpayer to add a plan in order to take full advantage of the IRC 199A deduction.

Computation of the IRC 199A deduction for individuals with taxable income exceeding the threshold amountAn individual whose taxable income exceeds the threshold amount can potentially have his or her IRC

199A deduction reduced or eliminated entirely in one of two scenarios.

W-2 wage limitation. The first scenario is that the QBI component calculation will reflect the presence or absence of W-2 wages with respect to the trade or business. In that calculation, the QBI component is the lesser of 20% of QBI or the W-2 wage limitation. The W-2 wage limitation is the greater of: (i) 50% of W-2 wages with respect to that trade or business (or aggregated trade or business); or (ii) the sum of 25% of W-2 wages with respect to that trade or business (or aggregated trade or business) plus 2.5% of the UBIA of qualified property with respect to that trade or business (or aggregated trade or business).13 If minimal or no W-2 wages are paid by the affected trade or business, it may have the effect of limiting the potential IRC 199A deduction for taxable income within the phase-in range and eliminating it altogether if taxable income exceeds the phase-in range. Within the phase-in range, only the applicable percentage of QBI and W-2 wages is taken into account in computing the individual’s IRC 199A deduction.

SSTB limitation. The other scenario applies when an SSTB is involved. If the individual’s taxable income is within the phase-in range, then only the applicable percentage of QBI and W-2 wages for each SSTB is taken into account for all purposes of determining the individual’s IRC 199A deduction. If the individual’s taxable income exceeds the phase-in range, then none of the individual’s share of QBI and W-2 wages attributable to an SSTB may be taken into account for purposes of determining the individual’s IRC 199A deduction; i.e., the IRC 199A deduction is lost.

Effective use of the IRC 199A deductionDeduction taken on taxpayer’s personal return. The IRC 199A deduction is available to sole proprietors, partners, LLC members, and S corporation shareholders and is taken on the taxpayer’s personal return (i.e., Form 1040) after his or her adjusted gross income has been determined. The deduction is available without regard to whether the taxpayer itemizes deductions or takes the standard deduction.

Loss of the IRC 199A deduction. The taxpayer’s IRC 199A deduction can be limited or lost entirely in two circumstances. The W-2 wage limitation can limit or eliminate the eligibility of the taxpayer to take advantage of the deduction. If the taxpayer is in an SSTB, his or her eligibility to take the IRC 199A deduction is lost if the taxpayer’s income exceeds the fully phased-in amount and is limited if the taxpayer’s

27

1 Pub. L. No. 115-97.2 Pub. L. No. 115-97, sec. 11011(a), adding IRC 199A.3 IRC 62(a), as amended by the 2017 tax act, sec. 11011(b)(1). See lines 7, 8, 9 of Form 1040 (2018).4 See IRC 63(b)(3) and 63(d)(3), as amended by the 2017 tax act, sec. 11011(b)(2)-(3).5 IRC 199A(a).6 IRC 199A(b)(1).7 26 C.F.R. 1.199A-1(b)(2).8 26 C.F.R. 1.199A-3(b)(1)(vi).9 26 C.F.R. 1.199A-1(b)(4).10 26 C.F.R. 1.199A-1(b)(12).11 Rev. Proc. 2018-57.12 26 C.F.R. 1.199A-1(c)(1).13 26 C.F.R. 1.199A-1(d)(2)(iv).14 26 C.F.R. 1.199A-3(b)(1)(vi).

income is between the threshold amount and the fully phased-in amount.

Services of a tax professional. The services of a professional CPA, other tax accountant, or tax attorney will be required to make the necessary computations for the IRC 199A deduction on behalf of the business owner/client. The financial advisor and retirement plan professional can assist the tax professional in helping the business owner/client maximize his or her opportunity to take full advantage of the IRC 199A deduction by illustrating how a properly designed and funded plan can reduce the taxable income of the affected business owner/client below the threshold amount, so as to avoid the application of the W-2 wage limitation and/or the SSTB limitation.

Planning for the combined use of the IRC 199A deduction and deductible plan contributions. The most apparent use of deductible plan contributions in the context of the IRC 199A deduction is to reduce the taxable income of a taxpayer below the threshold amount, so that the taxpayer can also take full advantage of the IRC 199A deduction. By lowering one’s taxable income below the threshold amount, the taxpayer takes advantage of both the deductible contribution to the plan and the IRC 199A deduction, which is equal to the lesser of: (i) the taxpayer’s combined QBI amount; or (ii) an amount equal to 20% of the excess (if any) of (A) the taxable income of the taxpayer, over (B) the net capital gain of the taxpayer.

When a deductible plan contribution is not necessary. The other planning scenario occurs when a deductible plan contribution is not necessary to lower the taxpayer’s taxable income below the threshold amount in order to qualify for the IRC 199A deduction. In that

scenario, taking the maximum possible deductible plan contribution might not result in the best overall tax situation for the taxpayer. Because the deduction for contributions to qualified retirement plans under IRC 404 is considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business,14 the deductible plan contributions will have the effect of lowering QBI.

Example. Assume, that a taxpayer’s taxable income was below the threshold amount before making a deductible contribution to a qualified retirement plan. If such taxpayer were to make a $50,000 contribution to the qualified retirement plan sponsored by the affected trade or business, it would have the effect of reducing the IRC 199A deduction for QBI by $10,000 (20% x $50,000). In certain circumstances, a QBI deduction may be more valuable than a deduction taken for a contribution made to a qualified retirement plan. This is so because the QBI deduction results in a permanent reduction of one’s taxes. A deduction taken for contributions made to a qualified retirement plan results in only a temporary reduction in one’s taxes because the amounts that must eventually be distributed from the qualified plan will have to be taken into income by the affected taxpayer. If the taxpayer’s taxable income is below the threshold amount and such taxpayer wishes to take maximum advantage of the IRC 199A deduction, while still saving for retirement on a tax-preferred basis, he or she may wish to explore Roth options, the contributions to which are made on an after-tax basis.

28

These articles are not intended by the authors to be used, and cannot be used, by anybody for the purpose of avoiding any penalties that may be imposed on them pursuant to the Internal Revenue Code. The information contained in this publication was prepared to support the promotion, marketing and/or sale of life insurance contracts, annuity contracts and other products and services provided by Nationwide Life Insurance Company.

These articles are not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional should be sought since neither the company nor its representatives give legal or tax advice. Federal tax laws are complex and subject to change.

As your clients’ personal situations change (e.g., marriage, birth of a child or job promotion), so will their life insurance needs. Care should be taken to ensure these strategies and products are suitable for long-term life insurance needs. You should weigh your clients’ objectives, time horizon and risk tolerance as well as any associated costs before investing. Also, be aware that market volatility can lead to the possibility of the need for additional premium in the policy. Variable life insurance has fees and charges associated with it that include costs of insurance that vary with such characteristics of the insured as gender, health and age, underlying fund charges and expenses, and additional charges for riders that customize a policy to fit your clients’ individual needs.

Before investing, understand that annuities and life insurance products are not insured by the FDIC, NCUSIF or any other federal government agency and are not deposits or obligations of, guaranteed by or insured by the depository institution where offered or any of its affiliates. Annuities and life insurance products that involve investment risk may lose value.

Federal income tax laws are complex and subject to change. The information in this publication is based on current interpretations of the law and is not guaranteed. Neither Nationwide, nor its employees, its agents, brokers or registered representatives gives legal or tax advice. You should consult an attorney or competent tax professional for answers to specific tax questions as they apply to your situation.

All guarantees and protections are subject to the claims-paying ability of Nationwide Life Insurance Company, and do not apply to variable underlying investment options. Investing involves market risk, including risk of loss of principal. Before selecting any product, please consider your clients’ objectives and needs, including cash flow and liquidity needs, and overall risk tolerance and time horizon as well as any associated costs.

Annuities and life insurance products are underwritten by Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company, Columbus, Ohio. The general distributor for variable annuity contracts and variable life insurance policies is Nationwide Investment Services Corporation, member FINRA. NFM-18519AO (07/19)

Advanced Consulting Group

1-800-321-6064Option 9, x677 6500

Advanced Consulting Group contributing writers

George W. Scheinbucknd1@nationwide.com

Dee Dee Chadwickchadwid3@nationwide.com

Shawn Brittbritts@nationwide.com

Thomas H. Duncantom.duncan@nationwide.com

Anne L. Meaghermeagha1@nationwide.com

Ryan Pattonpattor1@nationwide.com

Chuck Rolphrolphc@nationwide.com

Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. © 2019 Nationwide.

Important disclosure