Biz Needs for Health Insurance

Question 1

2 Categories of Biz Health Insurance Uses

Answer 1

1) Employee Benefits; 2) Biz Continuation

Question 2

Group Health Insurance

Answer 2

1) medical insurance; 2) disability income insurance; 3) accidental death and dismember insurance Alone or in any combination of the above

Question 3

Cafeteria Plans

Answer 3

Employees can pick from a menu of benefits, thus tailoring the benefit package to their needs.

Question 4

Funding of Cafeteria Plans

Answer 4

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

Question 5

Cafeteria Plans & Section 125

Answer 5

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.

Question 6

S Corp & Section 125

Answer 6

An S-corp owner with > 2% of the share is illegible to participate in a Section 125 plan.

Question 7

Benefits available under a Cafeteria Plan

Answer 7

1) Medical coverage; 2) disability income insurance; 3) accidental death & dismember; 4) long-term & short-term disability; 5) life insurance; 6) dependent care.

Question 8

Choices within Choices

Answer 8

• select from different levels of medical plans; - select from a wide variety of HMOs

Question 9

Biz Continuation Plans

Answer 9

1. Biz overhead expense insurance
2. Disability buy-sell plans
3. Key person (employee) disability insurance

Question 10

Biz overhead expenses insurance

Answer 10

It reimburses biz expenses & payroll when the business owner becomes disabled.

Question 11

Types of businesses purchasing biz overhead expense insurance

Answer 11

• Professionals in private practice
• Self-employed business owners
• Partners
• Occasionally close corporations

Question 12

Expenses covered by Business Overhead Expense Insurance

Answer 12

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

Question 13

Amount paid by a business overhead expense insurance

Answer 13

• 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

Question 14

Tax treatments for biz overhead expense insurance

Answer 14

• Premium: a tax-deductible biz expense
• Benefit payments - taxable income

Question 15

Disability Buy-Sell Plans

Answer 15

• 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.

Question 16

Elimination Period for a disability buy-selle plan

Answer 16

• Long, normally 2 years
• Makes sure that a business partner or shareholder is unable to return to the business

Question 17

2 Types of Partnership Buy-Sell Plans

Answer 17

1) An entity plan
2) A cross-purchase plan

Question 18

Entity Plan

Answer 18

• 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

Question 19

A cross-purchase plan

Answer 19

• 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.

Question 20

Key Person (Employee) Disability Insurance

Answer 20

• 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.

Question 21

Who is the key person in key person disability insurance

Answer 21

• a partner
• a working stockholder
• or a key executive

Question 22

How to determine of the economic value of the key person

Answer 22

• potential loss of biz income +
• expenses to hire and train the key person’s replacement
• The key person’s economic value = the disability benefit

Question 23

Disability Benefit Payments

Answer 23

• a lump sum or
• monthly payments

Question 24

Elimination Period & Benefit Period

Answer 24

• Elimination period: 30-90 days
• Benefit period: 1-2 years

Question 25

Key Person Disability Insurance Owner

Answer 25

• The business is the owner
• Biz also pays the premium

Question 26

Tax treatments for key person disability insurance

Answer 26

• Premiums are not tax deductible
• Benefits are tax-free income