Employee benefits: Boost insurance perks for the chosen few

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in Small Business Tax,Small Business Tax Deduction Strategies

One of the best fringe benefits around is the tax exclusion for employer-paid group-term life insurance. But the exclusion is limited to the first $50,000 of coverage, hardly enough for you and other top employees.

Strategy: Adopt an informal death benefit plan for a select group of employees. If you handle things right, your company can provide extra life insurance coverage at no tax cost to the employees.

Here’s the whole story: Usually, an employee may opt for more group-term coverage and pay the resulting tax. The amount of the tax is based on IRS-approved tables. Also, the plan can’t discriminate in favor of key employees.

Example: If the company provides group-term coverage of two times annual salary, an employee earning $150,000 a year can receive up to $300,000 of coverage. But if you provide $500,000 worth of coverage, the value of the entire coverage—including the first $50,000—is taxable to the employee.

When you set up an informal death benefit plan, your company agrees to add a fixed death benefit to an employee’s designated beneficiary if the employee dies before retirement. To ensure that it can meet its obligations, the company buys life insurance on the employee’s life and names itself as the beneficiary of the policy.

This IRS doesn’t consider this type of plan to be discriminatory, so you don’t have to offer the same deal to every employee. Reason: All you have is a mere promise from the company to pay the death benefit. A promise doesn’t constitute a discriminatory fringe benefit.

To maximize benefits for key employees, revise your group-term plan so the employer-paid coverage is capped at $50,000. Then your company makes up the difference for the select group of employees under the informal death benefit plan. These employees don’t owe income tax or FICA on any part of the coverage.

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