Page 286 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

272 The Complete Guide to Executive Compensation

provided that such contracts would be viewed as accident and health plans. More specifically,
paid premiums and benefits received would be considered medical care and excluded from
gross income subject to Section 213 of the IRC. This section permits itemized deductions in
excess of 7.5 percent of adjusted gross income.
To be eligible for favorable federal tax treatment, long-term-care recipients must be
unable to perform for themselves at least two of the six events of daily living for at least 90
days. These are bathing, continence, dressing, eating, toileting, and transferring self. This
applies to dying, chronically ill, and temporarily impaired individuals. While long-term pro-
tection for the executive is of some interest most would have sufficient assets to pay for the
care if needed. More important is the peace of mind of providing such coverage for one’s par-
ents middle-income people. Spending a few thousand dollars each year in premiums is worth
not being hit later on with expenses of up to $100,000 a year or more. One could buy a
policy with a daily (e.g., $150), weekly, or monthly maximum for either a limited benefit pool
total or unlimited lifetime benefits. Married couples are often able to draw benefits from the
same policy. Premium costs can be reduced if there is a front-end deductible before benefit
payments begin. Medicare coverage is often inadequate.
Medicare. Medicare is national health insurance for those aged 65 and older. In effect since
1966, it consists of Part A and Part B. Part A is focused on in-patient care (e.g., home care,
hospital, and nursing home); Part B is for outpatient care (including doctor visits and outpatient
hospital care). Part A is free; the Part B 2006 premium was $1,062 with a $124 deductible.
The 2003 Medicare Act introduced prescription drug coverage as part of Medicare.
Those eligible can choose to join a stand-alone plan, Medicare (if stand-alone plans are not
available), or no plan. It has been estimated that those with below-average prescription costs
might end up paying more in premiums than received in benefits. In 2006 the first $250 in
annual prescription costs was paid in full, 25 percent of the next $2,000 was reimbursed, 100
percent of the next $2,850 was covered, and finally 95 percent of all costs above $5,300 were
paid by the plan. The annual premium for 2006 was $420.

Medigap Health Insurance. Insurance carriers provide 10 standardized plans to supple-
ment inpatient and outpatient medical Medicare coverage. Plan A is the most basic and least
expensive, with coverages added going up the alphabet to J, the top plan. Insurance compa-
nies use one of three methods to cost out each plan: attained age (increasing each year with
age), community rated (everyone in a given area pays the same premium regardless of age),
and issue age (premium at year joining will be the same while growing older).

Adoptions
Many companies reimburse eligible adoption expenses up to a stated maximum. While this
is not a medical benefit, it equates to medical coverage for childbirth expenses. Adoption-
expense reimbursement levels the playing field for those unable to give birth. Sections 23
and 137 of the IRC detail the amount of unreimbursed adoption expenses that may receive
favorable tax treatment dependent on annual income. Given the limited expense and low
probability of use, it is of low executive interest.
Wellness Programs

The focus of wellness programs is to keep people healthy and to prevent illness. This is a win-
win scenario—the employee is healthier and the company saves money on medical expenses,