UNIVERSAL AMERICAN FINANCIAL CORP. 401(k) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF PLAN
Effective April 1, 1992, Universal American Financial Corp. (hereafter called the “Company”) adopted the Universal American Financial Corp. 401(k) Savings Plan (hereafter called the “Plan”), which is a voluntary defined contribution plan under which employees may elect to defer income from taxation under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The Plan is subject to the provisions of the Employee Retirement Income Security Act (ERISA) of 1974, as amended. The plan description below provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.
Plan Administration
The Company is the Administrator for the Plan. The Administrator is the named fiduciary that is responsible for execution of the Plan’s provisions, construction, required record keeping, directing and advising the Trustees regarding investment and payment procedures. They are also responsible for claims management and exercising such authority and responsibility as they deem appropriate to comply with ERISA and government regulations. The Company has contracted with Diversified Investment Advisors for recordkeeping services for the Plan. Investors Bank and Trust Company of Boston is the custodian for the Plan’s assets.
Administrative Costs
Permitted administrative expenses are paid by the Plan. The Company pays all other costs of operating the Plan.
Plan Changes
During 2005, there were changes to the terms of the Plan relating to investment options and the limitations on the level of funds held in the UAFC Stock Fund, as follows:
Investment options - The plan trustees reviewed fund performance and approved the recommendation to revise the investment options available to participants and in April, 2005, the Diversified Small-Cap Growth Fund and the American Funds-Growth Fund of America were added.
Limitation on the Level of Funds in the UAFC Stock Fund - In 2005, the plan trustees and the Universal American Board of Directors approved a revision to the Universal American Financial Corp. 401(k) Savings Plan to limit the level of funds in the UAFC Stock Fund for any participant to 50% of the participant’s total fund balance, effective October 1, 2005, with a one year implementation period.
Participation in the Plan
Any employee who has completed 250 hours within three months of service and has attained age 21 shall be eligible to participate in the Plan. Employees are eligible to participate on the first day of the Plan quarter following the date the employee has met the eligibility requirements. Employees who were participants in the Plan prior to the effective date of the amendment and restatement of the Plan shall continue to be eligible to participate in the Plan. Non-resident employees who receive no earned income from sources within the United States from the Company are not eligible to participate in the Plan. An employee ceases to be a participant if they cease employment for any reason (including death or retirement), or if the Company ceases to exist. If a person no longer meets the requirements for participation while they are an employee, they shall remain a participant but shall not be entitled to a share of any Company contributions, and may not make elective contributions until those requirements are met.
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Contributions
Eligible employees may contribute to the Plan, through payroll deductions, up to 100% of their eligible compensation to a variety of funds, including the Company’s common stock fund. They may also contribute distributions from any tax qualified plan under Code Section 401(a), or, any other plans from which distributions are eligible to be rolled over into this Plan pursuant to the Code. The maximum contribution allowed for 2005 was $14,000. Employees who are fifty years or older were also allowed to make an additional $4,000 catch-up contribution.
The Company may match employees’ contributions with employer contributions to the Company’s common stock fund. Beginning on January 1, 2004, the matching contribution was revised to be equal to 100% of the first 1% of eligible salary contributed to the plan by the participant and 50% of each of the next 2% of eligible salary contributed to the plan by the participant (contributions of greater than 1% up to 3%). In addition, the plan trustees approved a supplemental Company matching contribution, for 2004 and continuing to 2005, equal to a maximum of 50% of each of the next 2% of eligible salary contributed to the plan by the participant (contributions of greater than 3% up to 5%). The percentage for both the Company match and the supplemental Company match may be adjusted or discontinued as of a valuation date that is thirty (30) days after written notice of the change has been furnished to employees. The Company matching contribution is summarized as follows:
Participant
Contribution* | | Company
Match† | | Maximum
Company
Match | | Supplemental
Company
Match | | Total
Company
Match | |
| | | | | | | | | |
1.0% | | 100 | % | 1.0 | % | — | % | 1.0 | % |
2.0% | | 75 | % | 1.5 | % | — | % | 1.5 | % |
3.0% | | 67 | % | 2.0 | % | — | % | 2.0 | % |
4.0% | | N/A | | 2.0 | % | 0.5 | % | 2.5 | % |
5.0% | | N/A | | 2.0 | % | 1.0 | % | 3.0 | % |
Over 5.0% | | N/A | | 2.0 | % | 1.0 | % | 3.0 | % |
* Expressed as a percentage of the participant’s eligible salary.
† Expressed as a percentage of the Participant’s contribution.
Participant Accounts
Each participant’s account is credited with the participant’s contribution and allocation of the Company’s contribution and Plan earnings, and is charged with Plan losses and an allocation of administrative expenses. Allocations are based on participant account balances, or earnings, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account. The participants’ account balances that are reflected in the total asset value of the Plan is not the same as the total participants vested benefits, as all participants are not fully vested.
Vesting
The entire interest of a participant in their elective contribution account and qualified non-elective contribution accounts is 100% vested at all times. The interest of a participant in their discretionary and matching contributions accounts vest 25% after two years, 25% more per year thereafter, with 100% vesting after five years of service. Additionally, the entire interest of a participant in their discretionary and matching contributions accounts shall become 100% vested upon the occurrence of any of the following events: the cessation of participation due to retirement, death, attainment of age 65, or termination of the Plan. Upon (partial) termination of the Plan, or trust, or the final dissolution and liquidation of the Company, to the extent terminated, the interest in the Plan of each affected participant shall become fully vested. If a person ceases to be a participant for any reason, and their entire interest in his discretionary and matching contribution accounts has not become fully vested, the non-vested portion of these accounts are forfeited.
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Investment Options
Amounts credited to participants’ accounts under the Plan are invested by the employer-appointed investment committee. Upon enrollment in the Plan, a participant may direct employee contributions in any of the various investment options. These options consist of various equity investments (funds) and the Company’s common stock, a qualifying employer security.
The participant may elect, on not more frequently than any valuation date, to have all or any portion of his interest in any investment fund(s) transferred to any other investment fund(s). The participant may not transfer to any other fund any non-vested portion of Company contributions, including:
a.) a matching contribution made by the Company,
b.) non-elective contribution,
c.) discretionary contribution that is made in the form of Company stock.
Participant Loans
The Administrator may permit a participant to borrow from the trust fund an amount equal to between $1,000 and generally 50% of the value of their vested interest, but they may not borrow in the aggregate an amount greater than $50,000, reduced by the highest outstanding balance on loans to the participant during the twelve month period preceding the date a new loan is to be made. The loan shall be adequately secured and must be repaid within five years, unless the loan is used to acquire a dwelling unit. The participant must direct the Company to withhold from each payment and pay to the Trustee an amount sufficient to repay the loan over its term. If a loan is in default, the Administrator may treat the unpaid amount as a distribution to the participant from the Trust Fund. A participant may not apply for a loan while they have another loan outstanding.
Effective December 31, 2005 participants have outstanding loan balances totaling $394,660. These loans have various maturity dates, with interest rates ranging from 3.5% to 8.8%.
Payment of Benefits
Unless the participant otherwise elects, they normally shall start to receive benefits not later than the 60th day after the close of the Plan year in which the latest of the following occurs:
a.) participant’s attainment of age 65;
b.) participant’s attainment of his tenth year in the Plan;
c.) termination of participant’s employment.
Benefits are generally payable in a lump sum. Participants generally will have their entire balance distributed no later than April 1 following the calendar year in which they attain age 70 ½, or if later, in the year in which they retire. In cases of hardship, the participant may have a portion of their vested interest distributed to them. Upon attainment of age 59 ½, they may elect in writing to receive a single sum of their entire interest while continuing to stay in the Plan. If a participant dies, their beneficiary shall be paid a lump sum amount. If they elect to not receive a distribution of their vested interest as of the date they cease to be a participant, any amount of their company contribution account in excess of their vested interest shall be forfeited. The participant may elect to have any portion of their benefits to be directly transferred to an eligible retirement plan.
Forfeited Accounts
Forfeited non-vested accounts totaled $69,745 at December 31, 2005 and $47,533 at December 31, 2004. These accounts will be used to reduce future employer contributions. During the year ended December 31, 2005, employer contributions were reduced by $35,753 from forfeitures.
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NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
Basis of Accounting
The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the Department of Labor Rules and Regulations for Reporting and Disclosure under ERISA. Certain reclassifications have been made to prior year’s financial statements to conform to current period classifications.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates.
Investment Valuation and Income Recognition
The Plan invests in various investment securities, including mutual funds, company stock and investment contracts. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is possible that changes in the values of investment securities may occur in the near term and that such changes could materially affect participants’ account balances and the amount reported in the statement of net assets available for benefits.
The Plan’s investments are stated at fair value, except for its investment in group annuity contracts, which is valued at contract value. Shares of registered investment companies and other mutual funds are valued at quoted market prices which represent the net asset value of shares held by the Plan at year end. The Universal American Financial Corp. Company Stock Fund is valued at net asset value which is based on the quoted market price of Universal American Financial Corp. common stock. Participant loans are valued at outstanding balance, which approximates fair value.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Contributions
Employee and employer matching contributions are recorded in the period during which the Company makes payroll deductions from participants’ compensation.
Payment of Benefits
Benefit payments to participants are recorded upon distribution.
NOTE 3 - PLAN AMENDMENT AND TERMINATION
Although it has not expressed any intent to do so, the Company has the right to terminate or partially terminate the Plan, subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts. The Company also has the right or obligation to amend the Plan; various amendments have been made subsequent to the original Plan filing date.
NOTE 4 - TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service dated October 29, 2004, stating that the Plan is qualified under Section 401(a) of the Code and, therefore, the related trust is exempt from taxation. Subsequent to this determination by the Internal Revenue Service, the Plan was amended. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The plan administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan, as amended, is qualified and the related trust is tax exempt.
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NOTE 5 - CONTRIBUTION INCOME
The participants are allowed to choose among various investment alternatives. The contribution to these funds in calendar year 2005 originated from the participants’ salary deferral contributions of $1,787,342 and from participants’ rollover contributions of $345,365. The remaining contributions were made by the Company in the amount of $678,399, comprising the total contribution of $2,811,106.
All of the Company contributions purchased shares of the Company’s common stock. Participants do not direct the investment alternatives for the Company contribution.
NOTE 6 - INVESTMENTS
The following schedule of plan assets presents investments at December 31, 2005 and 2004:
| | December 31, 2005 | | December 31,
2004 | |
Description | | Units | | Per Unit | | Value | | Value | |
| | | | | | (In thousands) | |
Employer Securities | | | | | | | | | |
* Universal American Financial Corp. - Company Stock Fund | | 610,132.183 | | $ | 14.802 | | $ | 9,031 | | $ | 8,535 | |
| | | | | | | | | |
Group Annuity Contract | | | | | | | | | |
* Transamerica Stable Value Fund | | 81,657.028 | | $ | 15.032 | | 1,227 | | 963 | |
| | | | | | | | | |
Other Funds | | | | | | | | | |
Franklin Micro Cap Value Fund | | 24,234.977 | | $ | 36.990 | | 896 | | 816 | |
Templeton Foreign Fund | | 35,993.472 | | $ | 12.680 | | 456 | | 329 | |
Oppenheimer Global Fund | | 15,601.437 | | $ | 66.700 | | 1,041 | | 1,057 | |
* Transamerica Premier Equity Fund | | 81,919.471 | | $ | 22.050 | | 1,806 | | 1,535 | |
Transamerica Premier Growth Opportunities Fund | | 12,714.725 | | $ | 22.560 | | 287 | | 231 | |
Transamerica Premier Core Equity Fund | | 42,988.214 | | $ | 13.690 | | 589 | | 501 | |
Franklin Real Estate Securities Fund | | 6,436.876 | | $ | 25.730 | | 166 | | 65 | |
Fidelity Advisor Value Strategies Fund | | 2,862.464 | | $ | 29.650 | | 85 | | 33 | |
Fidelity Advisor Mid Cap Fund | | 3,755.317 | | $ | 24.270 | | 91 | | 43 | |
* Oppenheimer Quest Balanced Fund | | 71,658.126 | | $ | 17.860 | | 1,280 | | 1,236 | |
Wells Fargo Advantage Government Securities Fund(1) | | 65,045.217 | | $ | 10.460 | | 680 | | 542 | |
American Funds-Growth Fund of America | | 2,451.161 | | $ | 30.500 | | 75 | | — | |
| | | | | | | | | |
Registered Investment Companies | | | | | | | | | |
Diversified Mid Cap Growth Fund | | 36,931.750 | | $ | 11.060 | | 408 | | 335 | |
* Diversified Stock Index Fund | | 122,005.498 | | $ | 9.710 | | 1,185 | | 1,192 | |
Diversified Value and Income Fund | | 19,690.434 | | $ | 23.690 | | 466 | | 293 | |
Diversified Core Bond Fund | | 47,619.898 | | $ | 12.340 | | 588 | | 502 | |
Diversified Small-Cap Growth Fund | | 3,472.967 | | $ | 14.480 | | 50 | | — | |
| | | | | | | | | |
| | | | | | | | | |
Participant Loans | | | | | | 395 | | 380 | |
| | | | | | | | | |
Cash and Cash Equivalents | | | | | | | | | |
Interest bearing cash | | | | | | 95 | | 72 | |
Total Investments | | | | | | $ | 20,897 | | $ | 18,660 | |
(1) Effective April 11, 2005, the Strong Government Securities Fund changed its name to the Wells Fargo Advantage Government Securities Fund.
All investments are participant directed except for the matching employer contribution of company stock which is non-participant-directed.
The investments that are marked by an asterisk (“*”) represent 5% or more of the net assets of the Plan.
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NOTE 7 - INVESTMENTS IN GROUP ANNUITY CONTRACTS
The Plan has entered into traditional group annuity contracts primarily with insurance carriers. These contracts, which are included in the Transamerica Stable Value Fund, are fully benefit-responsive and are included in the financial statements at contract value. Fully benefit-responsive contracts provide for a stated return on principal invested over a specified period and permit withdrawals at contract value for benefit payments, loans, or transfers. Contract value represents contributions made under the contract, plus earnings, less Plan withdrawals and administrative expenses. The estimated contract value of the group annuity contracts, approximating the fair market value, was $1,227,442 as of December 31, 2005 and $962,961 as of December 31, 2004. There are no reserves against contract value for credit risk of contract issuer. The average yield on these contracts was 3.3% for the year ended December 31, 2005. At December 31, 2005, the crediting interest rate on this contract was 3.5%. Crediting interest rates are generally reset monthly and are reset based on formulas which may use market value, book value, duration and yield.
NOTE 8 — NON-PARTICIPANT DIRECTED INVESTMENTS
Information about the net assets and the significant components of the changes in net assets relating to the non-participant directed investments, for the years ended December 31, 2005 and 2004 is as follows:
Employer securities — Company stock fund | | 2005 | | 2004 | |
| | (In thousands) | |
Balance at beginning of year | | $ | 8,535 | | $ | 5,421 | |
Contributions | | 910 | | 797 | |
Net (depreciation) appreciation — realized and unrealized | | (221 | ) | 2,979 | |
Benefits paid to participants | | (482 | ) | (439 | ) |
Inter-fund transfers, unsettled trades, and fees | | 289 | | (223 | ) |
| | | | | |
Balance at end of year | | $ | 9,031 | | $ | 8,535 | |
NOTE 9 - PARTIES-IN-INTEREST
Certain Plan investments are shares of mutual funds managed by Diversified Investment Advisors, a subsidiary of Aegon. Diversified Investment Advisors is the recordkeeper for the Plan. Certain other Plan investments are shares of mutual funds managed by Transamerica Securities and Sales Corporation. The group annuity contract was issued to the Plan by Transamerica Life Insurance and Annuity Company. Transamerica Securities and Sales Corporation and Transamerica Life Insurance and Annuity Company are also subsidiaries of Aegon. In addition, Plan investments include shares of Universal American Financial Corp.’s common stock.
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