Presented by Paystrubmakr.com By John Wolf and Tom Cullen CPA
World Health Organization
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In general, insurance benefits
In general, insurance benefits are intended to address the financial needs of the employee’s family after the employee dies. A life insurance program may be designed to preserve the executive’s estate assets by providing sufficient liquidity to pay the federal estate and state inheritance taxes, as well as meeting the long-term needs of the beneficiaries. However, life insurance may serve one or more of the following corporate purposes:
(1) Protection against the premature death of a key employee;
(2) Funding of a deferred compensation agreement;
(3) Providing an additional fringe benefit;
(4) Funding a buy-sell agreement or stock redemption arrangement; and
(5) Avoiding the accumulated earnings penalty tax.
Company Paid Insurance
One of the most important employee benefits can be company-paid insurance. It is rare that a company does not maintain some form of insurance coverage for its employees. Perhaps except for health insurance plans, no type of fringe benefit is as common as employer-provided life insurance. In many instances, the company gets a deduction for the premiums it pays, and insurance protection is provided to the employee and his family at a minimum cost.
Life insurance as a fringe benefit has become quite popular among highly compensated employees. Not only does this coverage provide the economic protection enabling an employee’s beneficiaries to maintain an accustomed standard of living, but these various plans can also provide substantial income tax benefits to the employee.
Types of Life Insurance
Although the products offered by insurance companies seem without limit, there are only two basic types of insurance, whole life and term. All other forms or “products” are essentially variations of these two types of insurance.
Group Term Life
Generally, life insurance premiums are not deductible unless they are incurred as an ordinary business expense. However, there is a limited exception for $50,000 of group term life insurance coverage under §79. In order for a policy to constitute a group policy, it must cover either a group of employees or it must be part of a group of policies covering several employers under a master plan.
The requirements for qualifying group term life insurance are:
(a) Coverage must not constitute permanent insurance (Reg. §1.79-1(b);
(b) Disability insurance cannot be included;
(c) Coverage can apply only to employees, although spouses and dependents
can be covered up to $2,000;
(d) Excess benefits are taxable under the tables (See Reg. §1.79-3(d)(2));
(e) The plan must be written;
(f) There must be a formula for determining coverage based upon age,
years of service, compensation, or position;
(g) The plan must cover a group of employees which is usually defined as
at least 10 or more employees, although there are special rules for groups
less than 10; and
(h) The plan may not discriminate in favor of the key employees.
“Key Employee” Defined
For the purpose of applying the group-term insurance rules prohibiting discrimination in favor of key employees, a key employee is defined as a participant in a group-term insurance plan who:
(a) Is an officer (of the employer) and earns more than 150% of the §415(c)(1)(A) dollar limit on contributions and other additions to defined contribution plans;
(b) Is one of the ten employees owning the largest interests in the employer;
(c) Owns more than a 5% interest in the stock of a corporate employer or more than 5% of the capital or profits interest of a non-corporate employer; or
(d) Owns more than a 1% interest in the stock or profits of the corporate or non-corporate employer, and has annual compensation from the employer in excess of $150,000.
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