Xelan

IR-2005-114, Oct. 3, 2005

WASHINGTON – The Internal Revenue Service announced today that it has reached an agreement with Doctors Benefit Insurance Company, Ltd. (“DBIC”), assignee of xélan Insurance Company Limited. The agreement resolves various issues relating to group supplemental insurance programs offered to members of xélan, The Economic Association of Health Professionals, through four separate trusts created by xélan, Inc.

Without admitting or denying wrongdoing or legal liability under the Internal Revenue Code, DBIC agreed to cease operations and return approximately $500 million to participants in the programs. DBIC is being required to withhold taxes on the payments, which will be taxable to the participants when received. Additionally, under the terms of the agreement, DBIC agreed to make a $2.34 million non-deductible payment to the Internal Revenue Service to resolve issues arising in connection with its issuance of the supplemental policies.

The agreement included a disclosure authorization that allowed the IRS to issue this release. Section 6103 of the Internal Revenue Code strictly limits the IRS in disclosing taxpayer information.

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DOCTORS BENEFIT INSURANCE COMPANY, LTD.

Dear DBIC Participant:

After substantial negotiations with the IRS, DBIC has entered into a settlement agreement with the IRS regarding its four supplemental insurance policies. Pursuant to the agreed civil settlement, DBIC will commence liquidation proceedings, pay $2.34 million to the IRS, and distribute as follows:

• Current individual certificate holders will receive their current certificate values, calculated as of the date DBIC receives a Certificate of Intent to Dissolve from the Barbados Registrar of Companies;

• Individuals whose policies were terminated for failure to make minimum premium payments will receive their certificate values at the time of termination, less the applicable percentage that would have been deducted if they had kept paying minimum premiums (4% or 6% of the minimum $4000 premium);

• Individuals who have already received their experience adjusted refund benefits will receive the difference, if any, between that refund amount and the certificate value at the time the refund was calculated.

• Individuals presently receiving claims benefits will receive lump sum distributions rather than continuing with monthly payments; and there will be no downward adjustment because of increases to present value.

After DBIC has met all of its obligations through the liquidation process, if there are funds left over, they will be distributed to the individual certificate holders mentioned above pro-rata. It is contemplated that these distributions will take place no later than December 15, 2005.

The IRS will issue a press release which states that DBIC will cease operations and pay the non-deductible amount set forth above to the IRS, but also makes clear that DBIC is not admitting or denying wrongdoing or legal liability under the Internal Revenue Code. While not addressed in the IRS press release, the agreement also resolves the tax treatment of premium payments for DBIC’s affected certificate holders and their employers.

Current Certificate Holders

• Current certificate holders will be subject to tax on the full amount of the distributions from DBIC in the year of receipt.

• If the income is properly reported in the year of receipt, the IRS will allow in full the deductions claimed for premiums paid with respect to the DBIC supplemental insurance policies for all years in which premiums were paid.

  • Certificate Holders Who Have Already Received Experience Adjusted Refunds Prior to DBIC’s Settlement with the IRS

• The deductions for premiums paid on supplemental insurance policies will be allowed so long as the refunds were reported as income in the year of receipt.

The settlement agreement provides that the certificate holder will obtain the benefit of a single-level tax (that is, the distribution is being made directly to the certificate holder rather than the employer that paid the premium, so there is no tax effect at the employer level). Further, the agreement provides that the distribution will be reportable by the certificate holder on line 21 of the Form 1040 as “other income,” which treatment eliminates potential employment tax consequences (no FICA or FUTA withholding or contributions need by made by the employer). Finally, no penalty will be imposed on either the employer or the certificate holder, nor will any interest be due, provided the certificate holder timely files and pays his/her tax for the year in which the distribution is received.

DBIC has agreed to withhold 20% of the amount paid in 2005 and/or later years to certificate holders and to pay this amount over to the IRS at the time of distribution. The certificate holder will receive from DBIC a 1099MISC form with appropriate detail of this distribution. Each certificate holder will be entitled to claim on his/her tax return for the year of receipt a credit for taxes paid with respect to the withheld amount. Given that marginal tax rates exceed 20%, certificate holders may wish to consult with their tax advisors regarding whether any additional amounts should be paid to the IRS as estimated payments for the year of receipt.

If you have any questions, please feel free to contact Michael C. Durney, an attorney who represents many of the certificate holders, and who is familiar with this settlement. He can be reached by email at office@mdurney.com, or if necessary, by telephone at 202 965-7744.