Tax Considerations for Employee Benefits
Taxes on life insurance
Did you know that the first $50,000 of an employer-provided group life benefit can be excluded from compensation (per the IRS)? For those employees who receive group life insurance coverage over that amount, you include the cost of the excess insurance as taxable income to the employee.
See life insurance IRS tax rules (PDF) for more information.
Employees benefit when you pay disability premiums post-tax
Paying disability insurance premium on a post-tax basis increases the payable monthly benefit an employee receives while on claim1. Here are some examples that show how paying the premium post-tax increases the benefit employees receive.
Group disability benefit tax implications
Since group disability benefits can be structured a number of ways, understanding the tax implications for your business can be challenging.
1 This rule applies to disability programs that are set up with the employer paying 100% of the premium (non-contributory), the employer and employee sharing in the cost of coverage (contributory), or coverage where the employee pays 100% of the premium (voluntary). "Tax Choice" disability plans (IRS Revenue Ruling 2004-55) are not subject to the three-year look-back rule. Amending a disability program to be "Tax Choice" makes the plan exempt from the three-year look-back rule immediately.
2 The replacement ratio is calculated by dividing the payable monthly benefit by take home pay.
This content is intended to provide accurate and authoritative information on the subject matter covered. The accuracy of this information is not guaranteed and is provided with the understanding that The Principal is not rendering legal, accounting or tax advice. While this communication may be used to promote or market an idea that is discussed in this publication, it is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. Consult with legal counsel or other professional advisors on all matters pertaining to legal, tax or accounting obligations and requirements.