©2015, College for Financial Planning, all rights reserved. Session 16 Employee Benefits: Group Life Insurance and Disability Taxation CERTIFIED FINANCIAL.

©2015, College for Financial Planning, all rights reserved.

Session 16Employee Benefits: Group Life Insurance and Disability Taxation

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session Details

Module 9

Chapter(s)

1, 4

LOs 9-2 Identify income tax implications of the cost (premiums paid) of group life insurance coverage.

9-6 Analyze a situation to determine income tax implications of the business use of health or disability income insurance for an employer or employees.

16-2

The Cost of Employee Benefits

2013 costs of employee benefits from Bureau of Labor Statistics:

BenefitAverage cost

per hour% of

compensation

Civilian Employee Benefits - All $9.48 30.8%

Government Employee Health Insurance $4.86 11.7%

Government Employee Benefits - All $14.65 35.3%

16-3

Overview of Employee Benefit Plans

Benefits that protect the employee’s earnings• Health insurance• Accidental death and dismemberment

insurance• Travel/travel accident insurance• Dependent care assistance plans• Cafeteria plans• Educational assistance• Group legal plans• Executive perks• Non-cash fringe benefits 16-4

Overview of Employee Benefit Plans

Benefits that replace the employee’s earnings

• Group life insurance programs• Group short-term disability• Group long-term disability• Workers’ compensation• Social Security• Qualified retirement plans• Unemployment insurance• Supplemental unemployment

benefit plans• Severance pay plans 16-5

Overview of Employee Benefit Plans

Benefits that provide capital as part of the employee’s earnings• Incentive stock options• Nonqualified stock options• Stock appreciation rights• Junior stock plans• Phantom stock plans• Restricted stock plans

16-6

Group Life Insurance Requirements (Sec. 79)

Characteristics of Policy• Must provide a general death benefit• Must be provided to a group of employees

o group equals all employees, or, if fewero a group based on age, marital status,

or work-related factors such as duties performed, compensation, or length of service

• Coverage amount must be based on a uniform formula for all employees

16-7

Group Life Insurance Requirements (Sec. 79)

Plan must meet one of four requirements:

• At least 70% of employees must benefit• At least 85% of participants are not key

employees• Plan benefits a nondiscriminatory class of

employees• Plan complies with IRC §125 requirements

if part of a cafeteria plan

16-8

Characteristics of Group Life Insurance

• Annual renewable term• Face amount paid to beneficiary• Coverage based on compensation, position, service, or flat amount

• Low cost & tax advantaged• Simple administration• No medical exam• Premium waiver

Group Term Life

• Paid-up: accumulating units of single premium whole life, decreasing units of group term; employee purchases permanent portion

• Ordinary: combination term and permanent; may be contributory

• Both types provide some permanent coverage

Group Paid-Up

and Group

Ordinary

• Individual universal life contracts• Usually employee-paid premiums• Flexible premiums• Death benefit options• Potentially higher returns

Group Universa

l

16-9

Group Life Insurance Coverage

Type Description of Coverage

Group Survivors Income Benefit

• Monthly benefit paid to surviving spouse and children• No choice of beneficiary• Amount is taxable, not considered life insurance• Lump-sum payment not available• Spouse’s benefits continued for specified period or

until remarriage; children’s benefits cease at age 18 (age 24 if full-time student)

Dependents Group Life

• Coverage on spouse and unmarried children of employee; generally issued only with employee coverage

• Coverage amount limited to $2,000• Spouse coverage convertible; children’s may be

convertible

Supplemental Group Life

• Contributory group term coverage for specific class of (or all) employees, not selected individuals

• Generally requires evidence of insurability

Group Carve Out • Individual, discriminatory benefits for selected executives removed from group term coverage

16-10

Income Tax Implications of Group Term Life Insurance

Cost of Coverage Up to $50,000 Cost of Coverage over $50,000

• Deductible by employer (non-beneficiary)

• Nontaxable income to employee

• Deductible by employer (non-beneficiary)

• Taxable income to employee*

Employee contributions toward coverage are deductible from cost of employer-paid coverage over $50,000

* Exceptions: cost of excess coverage is not taxable to employee if beneficiary is a charity or the employer, or if the covered employee is disabled or one of certain retired persons.

16-11

Table I Rates

Age of Employee

Cost per $1,000 per

monthAge of

Employee

Cost per $1,000 per

month

Under age 25 0.05 50-54 0.23

25-29 0.06 55-59 0.43

30-34 0.08 60-64 0.66

35-39 0.09 65-69 1.27

40-44 0.10 70 and over 2.06

45-49 0.15

16-12

Table I Example

John is 52. His company provides him $250,000 of group term life as part of his benefit package. The current annual tax impact of this benefit on John is as follows:

52ageforincomeimputed12rate ITable$1,000

$50,000-amountFace

incometaxable552$1223.0$1,000

$50,000-$250,000

16-13

COBRA Qualifying EventsQualified

beneficiariesQualifying events Length of coverage

Covered employee Voluntary or involuntary termination

18 months

Change from full-time to part-time status

18 months

Disability (S.S. definition) 29 months

Plan termination 36 months

Spouses and other dependents

Employee’s• Death• Divorce• Legal separation• Eligibility for Medicare

36 months

Children of employees

Loss of dependent status 36 months

16-14

Flexible Spending Arrangements (FSAs)

• A cafeteria plan funded only with employee deferrals is called a flexible spending arrangement, or FSA – no FICA!

• In a flexible spending arrangement, the employee commits a dollar amount of salary reduction for the coming year.

• The employee’s salary will be reduced by the specified dollar amount, and the employee will forfeit any unused amount at year-end (“use it or lose it”).

16-15

Nontaxable Non-Cash Fringe Benefits

• Working condition fringe benefits (Must be business related and substantiated)o Business use of company car,o Professional dues and subscriptions

• No-additional-cost services

• Qualified employee discounts

• Use of on-premises athletic facilities

• De minimis fringe benefits o Limited use of copy machineo Occasional tickets for business purposeso Qualified transportation allowances

up to $250 per month • Meals and lodging furnished for

employer’s convenience

16-16

Disability Taxation

• Employer pays premium = Employee pays tax on benefit

• Employee pays premium = Employee does NOT pay tax on benefit

• Employee and Employer each pay a portion of premium = Employee pays tax on a portion of the benefit

16-17

Practice Problem 1Bill Rogers is a salesman for Titan Chemical Inc. His base salary is $3,500 per month. His total compensation (salary plus commissions) has averaged $89,552 per year for the last three years, and he has deferred $1,350 per month to the 401(k) plan and $200 per month to his FSA for the past three years. Titan Chemical also pays $1,200 to provide Bill with long-term disability coverage that will pay 50% of his base salary should he become disabled. Bill has increased this benefit to provide 67% of his base salary by making a $600 after-tax payroll deduction.

What will Bill’s disability payment be and how will it be taxed?

16-18

©2015, College for Financial Planning, all rights reserved.

Session 16End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits