Business Uses Of Life Insurance And Employee Benefits Flashcards
Group life as employee benefits
Life insurance premiums paid by the employer are tax exempt to the employee up to what amount?
$50,000 applies to both current and former employees including retirees
Group life as employee benefits
What amount of schedule premium is included in the employees W-2 income less the employees contribution?
Group term coverage greater than 50,000 the schedule premium per $1000 is included in employees W-2 income less employees contribution
Group life, as employee benefits
What is required for favorable tax treatment?
Must be non-discriminatory
Which means plan must cover 70% or more of all employees and at least 85% of the non-key employees
Group life, as employee benefits
Premiums paid by the employer for group health insurance are tax exempt, two and deductible by who?
Tax exempt to the employee
Deductible by the employer
Group life has employee benefits
Employer provides permanent life insurance coverage and pays the entire premium. What is the employee taxed on and is it deductible by the employer?
Employee is tax on the non-term portion of the premium
Premium his deductible by the employer
Group life, as employee benefits
Does group universal life provide any tax advantages to the employer?
No because premiums are usually paid by the employee
Split dollar life insurance
What is it?
Arrangement typically between an employer and employee, in which the cost and benefits of the life insurance policy are shared
Split dollar life insurance
What are the appropriate applications of split dollar life insurance?
Employer wishes to provide an executive with a life insurance benefit had a low cost and low cash outlay to the executive
When a pre-retirement death benefit for an employee is a major objective
Employers seeking a selective executive fringe benefit
Cannot use this for officers or directors of the corporation
Split dollar life insurance
What aspects of the policy can be subject to different types of splits?
Premium cost
Cash value
Policy ownership
Split dollar life insurance
What are the two premium cost split categories?
Classic or standard: employer pays a portion of the premiums, equal to the increase in cash surrender value of the policy
Level premium plan: employees premium share is level over an initial number of years
Split dollar life insurance
What is the cash value and death proceeds split
Purpose of the split of cash value or death proceeds is to reimburse the employer in whole or in part for its share a premium outlet in the event of employees, death or termination
Split dollar life insurance
What are the 2 policy ownership method splits?
Endorsement method: employer owns the policy, pays the entire premium, employee dies, split beneficiary designation provides for the employer to receive a portion of the death benefit equal to its premium outlay with the remainder of death proceeds going to the beneficiary, if employer terminates, the plan employer will receive cash surrender value the employee will receive nothing
The collateral assignment method: employee is the owner of the policy and responsible for premiums employer, makes interest free loans in the amount of the premium policy, assigned as collateral to the employer employees, death employer recovers the loan the remainder of the proceeds are paid to the beneficiary employer terminates, the plan employer will receive an amount equal to premium payments loaned employee will receive the policy.
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Split dollar life insurance
What is the income tax treatment?
Payment made by an employer must be accounted for either as a loan to the employee, or the economic benefit received by the employee must be treated as compensation
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Key employee life insurance
Who pays the premiums? Is the beneficiary and owns the policy?
The business
Key employee life insurance
Are premiums tax deductible, and are death benefits received tax free?
Premiums are not tax deductible
Death benefit is received income tax free by the business
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Executive bonus life insurance plan
What is it?
Employer pays a bonus to executive for purpose of purchasing cash value life insurance
Executive bonus life insurance plan
What are the mechanics of the plan?
Executive, his policy, owner insured and designates the beneficiary
Maybe discriminatory
Income tax deduction for the bonuses paid
Employee has taxable income, when the bonus is paid, even if paid directly to the insurer
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Life insurance and qualified plans?
Can be provided to a qualified plan as long as the incidental death benefit requirement is met…one of two test must be passed. The 25% test and the hundred to one ratio rule.
Cafeteria plans and flexible spending accounts
What are they?
Plan in which employees may within limits choose the form of employee benefits from options, provided by their employer
Must include cash option, which is to receive cash in lieu of non-cash benefits of equal value
Cafeteria plans
What are the advantages?
Employees appreciate the value
Helps control employer costs
Cafeteria plans
What is the disadvantages?
Are complex and expensive
Highly compensated employees may lose the tax benefits of the plan, if discriminatory
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Cafeteria plans
What are the tax implications?
Must comply with section 125, which provides an exception to the constructive receipt doctrine
Section 125 are not met. Employees are taxed on the value of benefits.
Limitation on non-taxable benefits to keep employees must not be graded and 25% of benefits provided to all employees
If employee chooses to benefit, it remains non-taxable. If employee chooses, cast equal to the cost of the benefit, cash is included in income.
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Cafeteria plans
What benefits can be made available in the cafeteria plan?
Accident and health benefits, but not long-term care insurance
Dependent care services
Group term life insurance
Health savings accounts HSAs
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Cafeteria plans
What benefits may not be provided?
Scholarships and fellowships
Educational assistance
Employee discounts, other than fringe benefits
Retirement benefits, such as qualified or nonqualified, deferred compensation, but 401(k) plan can be included
Simple cafeteria plans for small business
Eligible employers?
Employed on average 100 or fewer employees during either of the preceding two years
Can maintain the plan until they exceed 200 employees
Simple cafeteria plans for small businesses
What employees are eligible?
Oh employees with at least 1000 hours of service during the plan year non-employees, example partners, 2% or more owners of S corporations and sole proprietors are not eligible
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Simple cafeteria plans for small businesses
What employees are excludable?
Under age 21
Less than one year of service
Covered under collective-bargaining agreement
Nonresident aliens, working outside the United States
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Flexible spending accounts (FSAs)
What is it?
Is a cafeteria plan under which employees can be reimbursed for certain types of qualified expenses?
Funded by voluntary pretax salary reductions, may also include employer contributions
Flexible spending accounts FSAs
What are the two types?
Health and dependent care assistance
Flexible spending accounts (FSAs)
What is the maximum amount available for reimbursement of incurred medical expenses?
$3200 for 2024
Flexible spending accounts FSAs
when are they appropriate?
Employer wants to expand employee benefit choices without significant extra out-of-pocket cost
Employees have employed spouses with duplicate medical coverage
Employees contribute to health insurance cost
Employers medical plans have large deductibles, are coinsurance provision
Employees are nonunion
There is a need for benefits that are difficult to provide on a group basis, such as dependent care
Employee can choose to participate in both the health and dependent care for a total salary reduction of $8200 for 2024
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Flexible spending accounts FSAs
I can they be provided to self-employed person’s are partners
No
Flexible spending account FSAs
What are the advantages?
May be in funded entirely through employees salary reductions, except for administrative costs by the employer
Dependent care expenses, if allowed may provide more tax savings than using the child and dependent care credit
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Flexible spending account FSAs
What are the disadvantages?
Must meet all nondiscrimination requirements of cafeteria plans
Employees must evaluate their personal and family situation and file a timely election form every year to estimate their benefit needs
Could result in adverse selection that would ultimately raise benefit cost
Admin cost or greater
Employee fails to use all contributed amounts within a certain period unused amount is forfeited
Long-term care services cannot be reimbursed
Over the counter, medication’s, not eligible for reimbursement, except insulin
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Flexible spending accounts FSAs
And what are the tax implications?
Employee not subject to income tax, your payroll tax
Employer receives a tax deduction, for any amount paid
Employers payroll, subject to payroll taxes is reduced by the amount of the employees salary reduction contributions are not subject to FICA or FUTA
Prepaid legal services
If employer pays the cost of the services, what are the tax consequences?
Deductible by the employer
Included in gross income of the employee
Employer and child and dependent services
What are the tax consequences for the employee?
Employee does not have to include in gross income, the value of child and dependent care services paid for by the employer
Cannot exceed 5000 per year
Qualified employee discounts
Discount can be excluded from gross income under the following conditions?
Not available for real property or for personal property commonly held for investments
Property or services must be in the same line of business and watch the employee works
In case of property exclusion is limited to the gross profit component of the price to customers
In case of services, exclusion is limited to 20% of the regular customer price
Dental insurance
What are the tax implications for the employer and the employees?
Premiums paid by an employer or tax deductible
Benefits received by employee our income, tax free
