AIM 1-2-3

Tax Plus

What is AIM? It is a multi-disciplinary approach that is the intersection of tax and accounting, legal, and employee insurance benefits. It resides in that small spot where these specialties meet. The intent of this program is to smooth out the expense associated with employee insurance benefits. It is important to note that the way employee insurance benefits have traditionally been utilized is that only the premium is recognized as an expense. What is unique about this approach, and why it's methodology is patented, is that it uses the convergence of these disciplines (tax and accounting, legal and insurance benefits — see the Decision Tree below), to expand the definition of expense regarding employee group term life insurance coverage.

First let's look at the insurance benefits piece. To continue the analogy that tracks with depreciation, if you were purchasing a $100K piece of equipment, you would pay your initial down payment and at that point, you would depreciate or amortize that piece of equipment over time.

Now, let's compare that to an employee and their death benefit from their group term life insurance coverage. So, instead of a $100K piece of equipment, you have a $100K death benefit, and each year the sponsor pays the premium on that policy. Each year the premium is essentially the down payment on a new $100K piece of equipment, i.e., the death benefit. So you can “depreciate” the value of that $100K death benefit for the year, without effecting the balance sheet.

And here's the big benefit of this. This methodology gives you the flexibility to strategically allocate this offset to revenue to optimize the earnings per share (EPS) at the employer's discretion.

There are certain tax/accounting and legal regulations involved. For example, IRC §§79, 419, 419A, and Treas.Reg §1.31.3121 permit this program. These disciplines coming together, and not solely looking at each of these specialties in isolation, is the power of this program. It allows you to optimize what you are already doing without requiring additional coverage or additional premium payments. Based upon assumptions drawn from public records, we calculated how this program could potentially benefit you.

Innovation, Not Invention

So you are probably asking why this hasn't been done before.

The reason is, until 2016 and early 2017, the conditions were not right. Then, there was a perfect storm of changes that took place that laid the ground work for this opportunity, much like the events that triggered the invention of depreciation.

The first of those events, in June 2016, was a series of changes to regulations that expanded the deductibility of death benefits from only “Top Hat” to the entire employee pool. The opportunity to significantly improve the revenue stream of the corporation became possible with these changes. Before June 2016, this strategy was only available on a much smaller scale. Now, this has increased exponentially, where it has gone from being an academic exercise to a meaningful business decision. Depending on the size of the company, the impact has gone from a few million dollars, to tens, or even hundreds of millions of dollars annually.

The second event was a technical amendment by FASB in December 2016 that says that the sponsor is not required to recognize the death benefit as a liability or an asset on its balance sheet. It only has the expense on its income statement, which is why we asserted that The AIM (Actuarially Initiated Measurements) Program doesn't trigger a change in your balance sheet. The final change is courtesy of The Society of Actuaries. The 2017 mortality tables issued in March are much more robust and reflective of market conditions. Adjustments to mortality and interest rate assumptions have caused the cost of the death benefit rates to increase. One specific assumption that has been corrected is the investment rates of return, which has been adjusted downward from 6% to closer to 3%. Because of those lower investment expectations, premium expenses will increase. This final change, combined with the FASB amendment and the regulatory changes, magnifies the size of the opportunity.

Each of these events in isolation would be grounds for going ahead with this program. However, the confluence of these three major changes exponentially increase your control and flexibility over the fluctuations in your earnings, with no additional risk.

This is a very big opportunity. It's important to understand that this is a continuation of doing things in many respects how you've been doing them up to this point. The big difference is that by taking advantage of changes that have occurred in the regulatory environment, you are now able to optimize the choices available to positively impact your shareholder value. This is a risk-free program that builds on time-tested, GAAP compliant practices. It is an innovation, it is not an invention.

Here is a real life example:

AT&T

• Initial Estimates:
• Number of employees: 246,000
• Average insurance coverage: $72,000
• Average age: 39
• Certified allowable expense; $524,800,000
• Outstanding shares: 3,460,631,000
• Additional share increase: $0.15
• EPS (TTM): $2.12
• Annual increase: 7.2%

*****
Lawrence L. Bell, JD, LTM, CLU, ChFC, CFP®, AEP, a member of this newsletter's Board of Editors, has served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, GASB, FASB, IASB and OPEB solutions. To learn more, visit www.mycpo.net.