GIVE AWAYS, REBATES AND PROMOTIONS

1. GIVE AWAYS, REBATES AND PROMOTIONS Fraternal Benefits vs. Rebates and Unfair Inducements

2. Fraternal Benefits • Non contractual benefits offered to members of the fraternal benefit society

3. Fraternal Benefits • Under Internal Revenue Code Section 501(c)(8), a fraternal benefit society must: • Have a fraternal purpose • Operate under the lodge system • Provide for the payment of life, sick, accident or other benefits.

4. Fraternal Benefits • The IRS’s Exempt Organization Audit Guidelines state: • “As a general rule, such associations have been formed for the purpose of promoting the social moral and intellectual welfare of the members of such associations and their families, as well as for advancing their interests in other ways and in other respects…Many of these associations make a practice of assisting their sick and disabled members, and of extending substantial aid to the families of deceased members their work is at the same time of a beneficial and fraternal character because they aim to improve the condition of a class of persons who are engaged in a common pursuit and to unite them by a stronger bond of sympathy and interest. • Even if the members of an organization enjoy a common tie or goal, the organization does not serve a fraternal purpose unless its members engage in fraternal activities. A lodge’s performance of civic, benevolent or charitable functions may serve to establish a fraternal purpose in lieu of regular meetings and rituals but an organization whose fraternal features are so insubstantial as to make it indistinguishable from an ordinary insurance company does not qualify under IRC 501(c)(8).”

5. Fraternal Benefits • The Audit Guidelines cite General Counsel Memorandum 34607 (Sept. 13, 1971). • A fraternal benefit is a benefit offered by a fraternal benefit society which: • 1) promotes the social, moral and intellectual welfare of its members and their families; and • 2) is made available exclusively to its members (rather than the general public).

6. Fraternal and Insurance Benefits • Societies work with and through their members to perform civic, benevolent or charitable functions. • Fraternal benefits can be used to perform these functions. • In order to retain their tax exempt status as 501(c)(8) organizations, fraternal benefit societies are required to provide both insurance and fraternal benefits to their members.

7. Rebates and Unfair Inducement • Most states has anti-rebating and unfair inducement statutes. • Each state’s statutes varies a little bit from the other states

8. Rebates and Unfair Inducement • Rebates and unfair inducement laws prohibit insurers from: • “paying, allowing, or giving, or offering to pay, allow, or give, directly or indirectly, as an inducement to purchase or acquire life insurance, life annuity, or accident and health insurance, or after insurance has been effected, any thing of value whatsoever not specified in the contract.”

9. Rebates and Unfair Inducement • or “paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as inducement to such insurance, or annuity, • any rebate of premiums payable on the contract, • or any special favor or advantage in the dividends or other benefits thereon, • or any valuable consideration or inducement whatever • not specified in the contract;”

10. Rebates and Unfair Inducements • A violation of an anti-rebating or unfair inducement statute is considered an unfair trade practice and is included in the unfair marketing or unfair methods of competition laws. • Violations may subject fraternals to fines, penalties, bad press and loss of license. • Generally picked up in an audit or by complaint. • Most fraternal benefit societies want to comply with unfair trade practice requirements.

11. Rebates and Unfair Inducements • ANY fraternal benefit would be considered an “other valuable consideration or inducement other than such as may be specified in the policy”. • ALL fraternal benefits are non-contractual. • You become a benefit member of a fraternal benefit society by applying for membership and purchasing an insurance product – therefore ALL fraternal benefits could be considered an unlawful inducement or rebate unless there is an exception to the anti-rebating laws for either fraternal benefit societies as a whole or for fraternal benefits in particular.

12. Exceptions to Rebating/Unfair Inducment Laws • Some state laws state that anti-rebating laws only apply to “life insurance companies”. • Fraternal benefit societies are not considered “life insurance companies” – so in those states, the anti-rebating laws would not apply to fraternal benefit societies at all.

13. Rebate and Unfair Inducement Exceptions • Each state’s fraternal benefit society laws and regulations have a provision that fraternal benefit societies are exempt from any other state insurance laws unless they are expressly designated as applying to fraternal benefit societies.

14. Rebates and Unfair Inducement Exceptions • State unfair trade practices laws have an exemption similar to the following:” • …provided however that nothing in those provisions shall be construed as applying to or affecting the right of any society to determine its eligibility requirements for membership, or be construed as applying to or affecting the offering of benefits exclusively to members or persons eligible for membership in the society.”

15. Fraternal Benefits and Unfair Trade Practices Laws • Fraternal benefits which are made available to the members of the society should come under “fraternal membership benefit” exemption to the unfair trade practices laws – including the anti-rebating laws – as long as the fraternal benefit is made available to all members of the society.

16. Fraternal Benefits and Members • All members of the society do not need to qualify for each fraternal benefit. • Many members will never qualify many of the more popular forms of fraternal benefits currently offered by fraternal benefit societies. • college scholarships • newborn, child or orphan life insurance, etc.

17. Fraternal Benefit Design • Fraternal benefit rather than rebate: • 1) promotes the social, moral and intellectual welfare of its members and their families; • 2) is made available exclusively to its members (rather than the general public); • 3) is consistently advertised and portrayed as a fraternal benefit for its members; and • 4) is not based on the purchase of one specific insurance product.

18. Examples • Member Magazines • Educational resources • Financial workshops and seminars • Will, estate planning guides and folders • Financial tools and calculators

19. Examples • Discounted legal services • Carbon monoxide detectors • Radon screening kits • Identity protection services • Prescription savings benefit • National parks passes • College scholarships • Camp tuition • American flags

20. Examples • Retreats • Use of lodges and facilities • Bars and restaurants • Golf courses • Retirement home • Orphanages

21. Examples • Orphan Insurance • Uninsurable Child Life Insurance • Newborn Death Benefit • Cancer Benefits • Health screening kits

22. Examples • Volunteer Opportunities • Support for Church and Other Charities • Charitable contributions • Support for military

23. Examples • Conversion Credit On Juvenile Term Insurance. • Typically, a juvenile term life insurance policy is sold as Term to Age 18 (expires at age 18).  At expiry the juvenile insured may receive a “maturity dividend credit” of $1 per year per $1,000 of insurance.  The “credit” may be applied only to a new Life Insurance policy, but not new term insurance.  As an example, a Term to 18 policy is issued for $50,000 to a ten year old juvenile.  At age 18, the credit for new insurance is $400 ($1 x 8 years x 50).  The credit is applicable only for:  the first year of the new life insurance policy up to the amount of the credit (If the new life insurance first year annual premium is $900, the net premium to be paid separate from the “credit” is $500; if the new life insurance first year annual premium is $300, the entire first year premium is covered by the credit but the remaining $100 of possible credit is “lost”; none of the credit may be applied to the new life insurance second year premium.) • This “maturity dividend credit” is not provided in the contract language.  It is not available if the policy is surrendered before the expiry age of 18.

24. Examples • Dinners • Financial Planning Seminars • Retirement Planning Seminars

25. Giveaways and Promotions • Member vs. General Public • Rebate limitations for General Public • Dollar limitations vary from state to state • Other restrictions • Exemptions to state rebating laws

26. Unrelated Business Income Tax • Members vs. prospective members • Members vs. general public • Effect of UBIT

27. Questions?

28. Thank You! • Atty. Kathy Brost • Telephone: 920-886-9805 • kbrost@brostlawoffices.com • Atty. Chris Nowotarski • Telephone: 312-782-3636 • cnowotarksi@spklaw.com