Biz Needs for Health Insurance Flashcards
2 Categories of Biz Health Insurance Uses
1) Employee Benefits; 2) Biz Continuation
Group Health Insurance
1) medical insurance; 2) disability income insurance; 3) accidental death and dismember insurance Alone or in any combination of the above
Cafeteria Plans
Employees can pick from a menu of benefits, thus tailoring the benefit package to their needs.
Funding of Cafeteria Plans
1) An employer allocates a certain amount to each employee to buy the benefit package they desire 2) If the package costs > the allocated amount, the employee contributes to the difference
Cafeteria Plans & Section 125
IRS Code Section 125 allows employees to pay partial cost for a employer-provided health insurance package with pre-tax dollars. Otherwise, the contributions would be considered taxable income.
S Corp & Section 125
An S-corp owner with > 2% of the share is illegible to participate in a Section 125 plan.
Benefits available under a Cafeteria Plan
1) Medical coverage; 2) disability income insurance; 3) accidental death & dismember; 4) long-term & short-term disability; 5) life insurance; 6) dependent care.
Choices within Choices
- select from different levels of medical plans; - select from a wide variety of HMOs
Biz Continuation Plans
- Biz overhead expense insurance
- Disability buy-sell plans
- Key person (employee) disability insurance
Biz overhead expenses insurance
It reimburses biz expenses & payroll when the business owner becomes disabled.
Types of businesses purchasing biz overhead expense insurance
- Professionals in private practice
- Self-employed business owners
- Partners
- Occasionally close corporations
Expenses covered by Business Overhead Expense Insurance
Expenses that occur to maintain day-to-day operation of a business irrelevant to the owner’s disability status
- Rent/Mortgage, payroll, leased equipment, utilities
- It excludes the disabled owner’s compensation
Amount paid by a business overhead expense insurance
- limited to the covered expenses or the maximum payment stated in the policy.
- e.g. business expenses total $3,800 and the maximum payment is $4,000 => $3,800 will be paid
- e.g. business expenses total $4,200 and the maximum payment is $4,000 => $4,000 will be paid
Tax treatments for biz overhead expense insurance
- Premium: a tax-deductible biz expense
- Benefit payments - taxable income
Disability Buy-Sell Plans
- Same as a life insurance buy-sell agreement
- When a business partner or a shareholder is disabled, such a plan allows the company or other partnersshareholders to buy his/her interest in the company
- Funded under a disabilty income policy
- Usually a lump sum payment
- Proceeds are normally tax free.
Elimination Period for a disability buy-selle plan
- Long, normally 2 years
- Makes sure that a business partner or shareholder is unable to return to the business
2 Types of Partnership Buy-Sell Plans
1) An entity plan
2) A cross-purchase plan
Entity Plan
- The business buys out the ownership interest of the diseased/disabled partner
- e.g. if there are 4 partners, 4 policies
- Policy proceeds will go to the business
A cross-purchase plan
- The partners sign the sell-buy agreements among themselves, instead of between the company and the disabled/diseased partner.
- e.g. 4 partners => 12 polices.
Key Person (Employee) Disability Insurance
- Compensate the business for the loss of a key employee
- Monthly payments or a lump sum to pay for extra or outside services since the key person is disabled.
Who is the key person in key person disability insurance
- a partner
- a working stockholder
- or a key executive
How to determine of the economic value of the key person
- potential loss of biz income +
- expenses to hire and train the key person’s replacement
- The key person’s economic value = the disability benefit
Disability Benefit Payments
- a lump sum or
- monthly payments
Elimination Period & Benefit Period
- Elimination period: 30-90 days
- Benefit period: 1-2 years
Key Person Disability Insurance Owner
- The business is the owner
- Biz also pays the premium
Tax treatments for key person disability insurance
- Premiums are not tax deductible
- Benefits are tax-free income
