Northline Tool & Die: Medicare, a Mid-Treatment Carrier Switch, and an 80/20 Buy-Sell
Northline Tool & Die, Inc. is a Wisconsin C corporation with 34 full-time employees. It offers a fully insured group health plan ($2,000 deductible, $6,000 out-of-pocket maximum) and group term life at 2× salary. Founder Walter, 66, still works full time, is enrolled in the health plan and Medicare Part A, and declined Part B at 65. Sales manager Denise, 47, is mid-course in breast cancer treatment - surgery is done and 12 weeks of chemotherapy remain - and has already paid $4,100 toward her $6,000 out-of-pocket maximum. Northline is changing health carriers effective July 1, the start of its fiscal year, and the new plan uses a narrower network and formulary. Walter and his son, who own 80% and 20%, are drafting a buy-sell agreement and intend to have the corporation own and pay for the policies.
1. Was Walter right to decline Part B, and what should he do as he approaches retirement?
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Yes, and it costs him nothing. Northline has 34 employees, so it is a 20-or-more employer. The group health plan is primary for Walter while he is actively employed, and Medicare is secondary. Because he had qualifying coverage through active employment, he will get an eight-month Special Enrollment Period when the group coverage ends and no late-enrollment penalty.
Three items to check now.
- Part D. Find out in writing whether the group prescription plan is 'creditable.' If it is, no penalty later. If it is not, he accrues a premium penalty for every month without creditable coverage after 65. Get the annual creditable coverage notice on file.
- HSA. If he contributes to a health savings account, he must stop. Medicare entitlement makes him ineligible, and contributions after entitlement are excess contributions.
- Uniform treatment. The plan must offer Medicare-eligible active employees the same coverage as everyone else - no carve-out that pushes them onto Medicare.
At retirement. The group plan flips to secondary and he must enroll in Part B during the eight-month SEP. Miss it and the 10%-per-12-months late penalty follows him for life.
2. Denise is mid-chemotherapy when the carrier changes on July 1. What is legal, what is not, and what should the agent advise?
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What is legal. A fully insured plan cannot exclude Denise for a preexisting condition, charge her more, rescind her coverage, or single her out for a health-status reason. The change itself is permissible.
What actually hurts her.
- Accumulators reset. Her $4,100 toward the $6,000 out-of-pocket maximum is probably gone on July 1 unless the new carrier contractually credits prior accumulators. Some mid-year carrier changes do; many do not. Get that answer in writing before July 1, and if it resets, re-time any scheduled procedures.
- Network. Confirm the oncologist, surgeon, and infusion center are in-network. If the oncologist is not, ask about the plan's transition-of-care or continuity provision for an ongoing course of treatment, or a single-case agreement. Changing oncologists mid-chemo is a clinical risk, not an administrative detail.
- Formulary. Her anti-nausea and supportive drugs must be on the new formulary at a workable tier.
- Leave and enrollment. Continue her group coverage through any medical leave. Note that at 34 employees Northline is likely outside both federal FMLA (50+) and Wisconsin's family and medical leave law (50+); confirm any local ordinance.
What to avoid. A file showing the switch was driven by her diagnosis is a retaliation problem and an experience-rating problem. Rate-driven carrier changes are fine; document the business reason.
3. The corporation will own and pay for the buy-sell policies. What has to be right for this to work?
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1. IRC 101(j) notice and consent. These are employer-owned policies issued after 2006. The death benefit is excluded from the corporation's income only if, before issuance, the corporation gives the insured written notice of the intent to insure, the maximum face amount, and that it will be the beneficiary - and obtains his written consent. It cannot be fixed at death. The corporation also needs an applicable exception (death benefit paid to the insured's family or heirs, or the insured is a director or highly compensated employee) and must keep the §6039I records.
2. Redemption versus cross-purchase. With an 80/20 split, redeeming Walter's 80% must be a complete termination of interest under §302(b)(3): file the family-attribution waiver under §302(c)(2) and make sure he does not reacquire an interest for ten years. If it is not a qualified redemption, the corporation's payment is a dividend to the extent of earnings and profits - a disastrous result on a seven-figure buyout.
3. Basis. In an entity redemption the son gets no step-up and his basis does not change. In a cross-purchase the son buys the shares directly and takes a full basis step-up - but he owns the policy, pays premiums with after-tax dollars (or receives a deductible §162 bonus), and there is no 101(j) issue at all.
4. Mechanics. The agreement needs a valuation formula, mandatory purchase triggers (death, disability, retirement), policy amounts sized to the formula and reviewed annually, and ownership and beneficiary designations that match the agreement.
5. Tax character. Premiums are not deductible. Proceeds are income-tax-free if 101(j) is satisfied, but the policy's cash value and the death benefit increase the value of the stock - and therefore Walter's estate. Run both structures past the client's CPA and counsel before anything is issued.