A recent Businessweek article highlighting what it calls the “drawbacks” of annuities is the latest in a long line of articles panning the financial products. But do annuities—especially variable annuities—deserve their bad reputation, or are annuities just an easy target of the mainstream media? And, where annuities are the right choice for your clients, how can you counter the negative press to help them make the right investing decision? Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of annuities in Advisor’s Journal, see Women Are Leading Purchasers of Immediate Annuity Customers (CC 10-107), Medicaid Compliant Annuities (CC 10-78), & Indexed Annuities: Still Insurance (CC 10-42).

For in-depth analysis of variable annuities, see Advisor’s Main Library: Section 19.2 A—Amounts Received As An Annuity.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the new Health Care Act which affects both employers and employees alike. Thus, it is important for wealth managers to be informed on the changes which will begin to appear so that they may better prepare clients.

The Internal Revenue Service issued interim guidance earlier this week to employers on informational reporting on each employee’s annual Form W-2 of the cost of the health insurance coverage they sponsor for employees. The IRS emphasized that this new reporting to employees is for their information only, to inform them of the cost of their health coverage, and does not cause excludable employer-provided health coverage to become taxable; employer-provided health coverage continues to be excludable from an employee’s income, and is not taxable.

Section 9002 of the Patient Protection and  Affordable Care Act of 2010  (Affordable Care Act),[1] provides that employers are required to report the cost of employer-provided health care coverage on the Form W-2. The IRS issued a notice last fall, which made this requirement optional for all employers for the 2011 Forms W-2 (generally furnished to employees in January 2012).[2] In the newest guidance, the IRS provided further relief for smaller employers (those filing fewer than 250 W-2 forms) by making this requirement optional for them at least for 2012 (i.e., for 2012 Forms W-2 that generally would be furnished to employees in January 2013) and continuing this optional treatment for smaller employers until further guidance is issued.[3]

The new notice also provides guidance for employers that are subject to this requirement for the 2012 Forms W-2 and those that choose to voluntarily comply with it for either 2011 or 2012. The notice includes information on how to report, what coverage to include and how to determine the cost of the coverage.

Generally, Notice 2011-38 provides interim guidance on informational reporting to employees of the cost of their employer-sponsored group health plan coverage. This informational reporting is required under § 6051(a)(14) of the Code, enacted as part of the Affordable Care Act  to provide useful and comparable consumer information to employees on the cost of their health care coverage.

This reporting to employees is for their information only, to inform them of the cost of their health care coverage, and does not cause excludable employer provided health care coverage to become taxable.

Notice 2011-38 provides interim guidance that generally applies beginning with 2012 Forms W-2 (that is, the forms required for the calendar year 2012 that employers generally are required to furnish to employees in January 2013 and then file with the Social Security Administration (SSA)). Employers are not required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2013.[4]

The notice also provides additional transition relief for certain employers and with respect to certain types of employer-sponsored coverage. This transition relief will continue at least through the 2012 Forms W-2 which are required to be furnished to employees in January 2013. In other words, those employers to which the additional transition relief applies (which includes smaller employers that are required to file fewer than 250 2011 Forms W-2) will not be required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2014. This transition relief will continue until the issuance of further guidance by the IRS.

For additional discussion on the Affordable Care Act see Study Exposes Impact of Health Care Act’s Employer Penalties, and Health Insurance Coverage for All Americans.

The 2011 Form W-2, prior IRS Notice 2010-69 deferring the reporting requirement for 2011, and Notice 2011-28 containing the new guidance are available on IRS.gov.

Tomorrow’s blogticle will continue to discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] Public Law 111-148.

[2] See Notice 2010-69.

[3] See Notice 2011-28.

[4] See Notice 2010-69.

The New York Department of Insurance, Office of General Counsel, held on February 25, 2011 that insurance carriers cannot refuse to convert a term policy to a permanent policy on the ground that the policy will be sold on the secondary market. The primary issue in the case was whether the converted policy is a “new” policy that must satisfy anew the insurable interest requirement. Nevertheless, this ruling will not affect all term policies, since many term life insurance policies are not convertible. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of life settlements, see Advisor’s Main Library: B–The Life Settlement Industry.

Why is this Topic Important to Wealth Managers? This topic presents discussion on the child and dependent care credit. For those wealth managers who participate fully in clients planning decisions, it is helpful to understand the implication of tax credits generally. This particular blogticle explores one such credit, the child and dependent care credit.

In addition this blogticle presents an excerpted preview of new, updated material from Advanced Markets which will be available soon (see www.advisorfx.com). Over the coming 9 months, the entire AUS service is being revised and will be rolling out monthly. The updating will include many new areas and a sharper focus with practical explanations and client presentation aides for current areas. We look forward to helping you secure your next sale.

A credit is available for certain child and dependent care expenses incurred by a taxpayer as a result of employment.[1] Eligible taxpayers are allowed a credit of up to 35% of certain expenses incurred for the care of a “qualifying individual.” [2] However, the credit is subject to several restrictions.

First, the 35% is reduced (but not below 20%) by one percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds $15,000.[3] The effect of this reduction is that for taxpayers with adjusted gross income of more than $43,000 the applicable percentage is 20%.

A second restriction further reduces the credit by limiting the amount of expenses eligible for the credit to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.[4]

A “qualifying individual” is defined as: (1) a child under age 13 for whom the taxpayer is entitled to take a dependency exemption, (2) a physically or mentally incapacitated dependent, or (3) a physically or mentally incapacitated spouse.[5]

Expenses for household and dependent care services are “employment related” if they are incurred to enable the taxpayer to be gainfully employed.[6] “Gainful employment” includes periods in which the taxpayer is employed full-time, part-time, or in active search of gainful employment.[7]

Expenses for services outside the taxpayer’s household qualify only if they are in respect to a child under age 13 or a qualifying individual who regularly spends at least eight hours each day in the taxpayer’s household.[8] However, no amount of any expenses for overnight camp will be considered “employment-related.” [9]

Payments for child or dependent care to a close relative qualify for the credit so long as: (1) neither the taxpayer nor his spouse is entitled to claim the relative as a dependent; and (2) the relative is not a child of the taxpayer who is younger than age 19 at the close of the taxable year. Taxpayers must provide the name, address and taxpayer identification number of the child care provider in order to claim the credit.[10]

The full material presented under this section will be available soon. Check back with Advanced Markets for more information. Tomorrow’s blogticle will continue to discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] IRC Sec. 21(a)(1).

[2] IRC Sec. 21(a)(2).

[3] IRC Sec. 21(a)(2).

[4] IRC Sec. 21(c).

[5] IRC Sec. 21(b)(1).

[6] IRC Section 21(b)(2).

[7] Treas. Reg. §1.21-1(c)(1).

[8] Treas. Reg. §1.21-1(e)(1).

[9] Treas. Reg. §1.21-1(d)(6).

[10] IRC Sec. 21(e)(9).

Republicans on the House Financial Services subcommittee are pushing back on the issue of Registered Investment Advisor user fees, citing the cost to small businesses. But the SEC insists that it cannot conduct adequate RIA examinations without either charging user fees or delegating examination authority to an SRO that will charge user fees. The argument over user fees was prompted by the release, earlier this year, of the Dodd-Frank mandated SEC study on enhancing RIA examinations. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of recent SEC rulemaking in Advisor’s Journal, see SEC Unprepared to Implement a Fiduciary Standard for Broker-Dealers (CC 11-33), SEC Fiduciary Standard Study Answers Few Questions (CC 11-25), Study Finds that Universal Fiduciary Standard Will Hurt Investors (CC 10-97) & What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act (CC 10-40).

Why is this Topic Important to Wealth Managers? This blogticle presents discussion on the state of affairs of the country’s preparedness for retirement. The low confidence that is reflected in the responses indicates a direct opportunity for wealth managers to assist more individuals.

A recent 2011 annual survey found that the number of investors who are “not at all confident” about having enough money for retirement reached its highest levels in 21 years, representing twenty seven percent of the survey population. [1] At the same time those who were “very confident” about having enough money for retirement was found to be only thirteen percent. Thus, wealth managers have an opportunity to help those who are not in the thirteenth percentile, or eighty seven percent of investors.

These low responses are surprising given the fact that the report also found sixty eight percent of workers have saved for retirement. In addition, fifty nine percent say they and/or their family are currently saving.

Nevertheless, the report found twenty nine percent of workers report savings levels below $1,000. Moreover, fifty six percent of workers report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.

Good news for wealth managers though, the report also found “many workers think they could save more than they are currently saving for retirement.” Around sixty eight percent of all savers and forty eight percent of non-savers believe it is “reasonably possible” for them to start saving more.

Furthermore, the report found “many workers continue to be unaware of how much they need to save for retirement.” An astounding figure, only forty two percent reported they have tried to calculate how much money they will need to save for a comfortable retirement.

The report also found the likelihood of retirement planning calculation increases with household income, education, and other non-savings financial assets.  Even for those who make calculations about retirement, the report found amazingly “workers often guess at how much they will need to accumulate.” Forty two percent of workers reported they guessed at the amount they need to save.

Only twenty one percent reported to have asked a financial advisor and an additional twenty one percent reported doing their own estimate.  Some rely solely on the scuttlebutt; nine percent reported they rely only what they read or hear is needed. Only five percent reported to fill out a worksheet or form in doing retirement calculations.

The report notes that one possible explanation for the continuing decrease in overall retirement confidence can be attributable to the fact that workers, investor, savors and others “are becoming more realistic about their prospects for a financially comfortable retirement given their current level of retirement preparations.”  This realization appears to be consistent across all age levels, not just those nearing retirement. For example, workers in lower age brackets “are statistically no more likely than older workers to state they are not at all confident. “ The report notes, “[t]his might seem counter-intuitive given the positive relationship between age and accumulated savings, but it is likely due to the sizable minority of older workers who have very little savings.”

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[1] See Employee Benefit Research Institute. “The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting ‘the New Normal’”. March 2011. EBRI Issue Brief #355. http://ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4772. Last Accessed 3/28/2011.

An executive top-hat plan can be a great way to attract and retain highly qualified executives or supplement a business owner’s compensation, but the plans have a big downside. Because the plans are generally unfunded, major events at the sponsor, like a sale or insolvency, can decimate a plan and leave participants empty handed. The effect on a top-hat plan when a sponsor liquidates its assets is illustrated by a recent Seventh Circuit Court of Appeals case. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of deferred compensation plans in Advisor’s Journal, see Tax Court Calculates FMV of Policies Distributed from Terminated 419 Plan (CC 11-35) & Tax Courts Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit Plan (CC 11-14).

For in-depth analysis of nonqualified deferred compensation plans, see Advisor’s Main Library: Non-Qualified Plans, Split-Dollar.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion on one area of the insurance world that is often not discussed. Nevertheless, insurance fraud is a real issue that should not be neglected. Not only do clients get caught up in the action but wealth managers sometimes too can play a part. Therefore it is important for wealth managers to stay cognizant of the issue to avoid any illegal or fraudulent schemes.

A Brooklyn woman arrested after a fist fight, a surgeon who made $3.5 million by billing for working more than 24 hours a day, and a Putnam County man who said assailants tied him up and left him inside his burning liquor store.

Those are among the 668 people who were arrested last year on charges related to insurance fraud, according to the New York State Insurance Department’s Frauds Bureau.

The Bureau earlier this month released its annual report for 2010. The report shows that the Bureau:

• Received 24,161 reports of suspected fraud in 2010, versus 24,920 reports received the year before. Of the 2010 total, the vast majority – 23,409 – were received from licensees required to submit such reports to the Department and 752 were received from other sources, such as consumers and anonymous tips.
• Worked on cases resulting in 449 criminal convictions and led or participated in investigations resulting in 668 arrests, down about nine percent from 2009.

Section 403 of the New York Insurance Law authorizes the Insurance Department to levy civil penalties of up to $5,000 plus the amount of the claim on individuals who commit fraudulent insurance acts. Under the provisions of Section 2133 of the New York Insurance Law, the Department is also permitted to levy a  civil fine of up to $1,000 for possession of a fraudulent automobile insurance identification  card and up to $5,000 for each additional card possessed.

The Frauds Bureau commenced 31 civil fine proceedings in 2010. Of those, 24 were settled by stipulation and 7 went to hearings. Fraudulent homeowners, workers compensation and disability claims were among the types of civil fine cases in 2010, in addition to fraudulent auto theft and vehicle arson. As a result of the Bureau’s civil enforcement activities, $370,405 in penalties was imposed during 2010.

Court-ordered restitution totaled $6.6 million during the past year as a result of Frauds Bureau criminal investigations, up by more than 29 percent over the total for 2009. Moreover, insurers saw savings of $9.3 million in connection with fraudulent claims investigated by the Bureau versus $4.0 million the year before, or more than twice the 2009 total and the highest savings total since 2004 by more than 29 percent from 2009.

The arrests included one involving a Brooklyn woman charged with insurance fraud after reporting her car stolen. In fact, it had been impounded by police after she was earlier arrested in connection with shop lifting and a subsequent fist fighting incident.

Also arrested was a Brooklyn surgeon. He was accused of defrauding Medicare and other health care programs of $3.5 million by submitting fraudulent billings. An investigation, carried out by the Medicare Fraud Strike Force, of which the Frauds Bureau is a member, found that he would have had to have worked around the clock to earn the billings.

A Putnam County man was arrested after he told police he was robbed by unknown assailants who tied him up and left him inside his burning liquor store. An investigation found that he had intentionally set the fire in an unsuccessful attempt to collect on an insurance claim.

The Frauds Bureau was established by an act of the Legislature in 1981 as a law enforcement agency within the New York State Insurance Department. The Bureau’s primary mission is the detection and investigation of insurance fraud and the referral for prosecution of persons or groups that commit acts of insurance fraud. The Bureau is headquartered in New York City, with six additional offices across the State: Mineola, Albany, Syracuse, Oneonta, Rochester and Buffalo.

Tomorrow’s blogticle will present new wealth management ideas for the Second Quarter 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Sales of variable annuities (VA) with guaranteed living benefit (GLB) riders continue to grow exponentially, according to LIMRA’s Variable Annuity Guaranteed Living Benefit Election Tracking Survey. The Survey showed a 78 percent increase in assets of VAs with GLB riders, from $292 billion in the fourth quarter of 2008 to $521 billion in the fourth quarter of 2010.

Advisors are likely to find that the protection offered by GLB elections will remain a popular option until consumers regain confidence in other investing prospects. But with unemployment still around 9%, it could be a while before we reach that turning point. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of guaranteed living benefit sales in Advisor’s Journal, see More Consumers Buy Guaranteed Living Benefits Riders (CC 10-70)

For in-depth analysis of the topic of the taxation of annuities, see Advisor’s Main Library: A—Amounts Received As An Annuity & B—Amounts NOT Received As Annuities

National Underwriter Offers Tax Advisors Expert Analysis of the Impact of the Recently Passed Tax Relief Act of 2010 on Their Clients

The proprietary analysis is the only practitioners’ guide in Q&A format that answers the most critical questions asked by clients on insurance, estate and gift tax law changes.  National Underwriter’s wealth management experts and report authors, Professor William H. Byrnes, Esq., LL.M, CWM and Robert Bloink, Esq., LL.M., noted, “While most media attention has focused on the Act’s retention of existing tax rates on the highest-earning Americans, tax, insurance and investment advisors are finding that the most important changes, from their perspective, are likely to be found in insurance, estate and gift tax provisions that will drive client decisions on investment strategy and wealth management priorities in 2011 and beyond.”

“This is the only guide available on the market today that gives financial planners and producers issue-specific, time-critical information in Q&A format that addresses their most important technical questions with content that can also be used directly in client presentations,” Prof. Byrnes added.

Why is this Topic Important to Wealth Managers? This blogticle is part of our casual Friday series. It presents wealth managers with information on the start-up expense deduction as well as general information on tax law.

Here at Advanced Markets FYI, we’ve been working in tax law as applied to wealth management for a number of years, and must say it is rare to see mistakes by the Department of the Treasury. In fact, the general practice of a tax lawyer is to read a particular Code Section and corresponding Treasury Regulations multiple times until it finally makes sense. There are however, some instances where no matter how many times you read a Code Section and/or Treasury Regulation something does not add up.

At this point you have a few options. First, maybe you re-read it because chances are the Department of the Treasury and IRS did not made a mistake. As a general matter, it is unusual to find authoritative text that contains an error. So maybe by this point you’ve now corrected your misunderstanding with another proper reading taken with the underlying premise that the Treasury does usually not foul up. If you are still not sure that what you’re reading makes sense, it may be helpful to find more information about the subject. For example finding articles, journals or papers written on the subject will generally add clarity to a particular issue. However, the specific facts and circumstances upon which you are trying to apply the Code or Regulations are commonly unique. Furthermore, not every tax subject or Code Section is written about extensively elsewhere.

Now assuming you’ve spent significant time and diligence reading the primary source and looking for secondary sources to gain a better understanding, it’s then time to break out the big guns. The way we see it is, you have two options at this point. You can find a tax expert to examine the subject in detail with your particular question in mind. It is usually helpful to ask questions and work your way through a problem with another expert who sees the world slightly different than yourself (slightly is used as a relative term in this context). However, if you still don’t have the answer you’re looking for, you can always Blog about it!

Thus, we believe we have come across an error in the Code and Regulations (frankly we think they should give an award when this happens, but we attribute non-recognition to lack of funding anyway). We therefore put it up to you to prove us wrong…

The Small Business Jobs Act of 2010 Section 2031 amends Section 195 Subsection b of Title 26 of the United States Code. The amendment to the Code allows for a $10,000 deduction for start-up expenses with a reduction in the deduction for expenses over $60,000 after Dec. 31, 2009.[1]

Further, the IRS website states (although not authoritative):

Sect. 2031: Increase in amount allowed as deduction for start-up expenditures in 2010

For taxpayers starting an active trade or business, the new law increases the amount the taxpayer is allowed to elect as a deduction for start-up expenditures under section 195(b) for taxable years beginning after December 31, 2009. Section 2031 allows up to $10,000 as a deduction for start-up expenditures, but requires a dollar-for-dollar reduction of the $10,000 deduction if startup expenditures exceed $60,000. [2]

However, the Regulations nevertheless say something else… They appear to have not been amended along with the Code Section; thus the deduction allowed under the Treasury Regulations is only $5,000 (as was the limit before enactment of Section 2031 of the Small Business Jobs Act). Take a look for yourself. What is really interesting (at least to some tax professionals) is that Treasury Regulation Section 1.195 has been reversed and in its place one may be directed to Section 1.195-T or Temporary. Since the Temporary Regulation Section expires during 2011, perhaps it was not amended on purpose? All the same, the guidance is not in accordance with the Code. However, it is not likely that any court would determine the mismatch of information as anything other than an administrative oversight and most courts would likely follow the amended Code section’s limits as passed by Congress.

Next week’s blogticles will present new wealth management ideas for the Second Quarter 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] See The Small Business Jobs Act of 2010. PL 111–240, Sept. 27, 2010. Section 2031(a); 26 U.S.C. 195(b).

[2] See Internal Revenue Service. “Small Business Jobs Act of 2010 Tax Provisions”. http://www.irs.gov/businesses/small/article/0,,id=230307,00.html. Page Last Reviewed or Updated: February 16, 2011. Last Accessed 3/22/2011.