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Boost your life insurance perks … and save

by on
in Employee Benefits Program,Human Resources

One of the best fringe benefits around today is one of the oldest: the tax exclusion for employer-paid group term life insurance.

But the exclusion limits only the first $50,000 of coverage under a nondiscriminatory plan. Anything over that amount is subject to federal income tax. And most of your key employees, including yourself, probably require additional coverage.

Strategy: Adopt an informal death-benefit plan for select employees. As long as you handle things right, your company can provide extra life insurance coverage at no tax cost to the employees … or you.

Here’s the whole story: In the usual situation, an employee may opt for more group-term coverage and pay the resulting tax. The tax due is based on an IRS-approved table linked to the employee’s age.

For example, a 55-year-old employee receiving $250,000 of employer-paid coverage faces a tax liability of $1,532 in 2006.

Furthermore, the plan can’t discriminate in favor of your company’s key employees. If the company provides group term coverage of twice your annual salary, an employee earning $150,000 a year can receive coverage up to $300,000.

However, if he or she is entitled to $500,000 worth of coverage, the plan will be considered discriminatory. That means the value of the entire coverage—including the first $50,000 of coverage—is taxable to the employee.

Unique strategy: When you set up an informal death-benefit plan, your company agrees to add a fixed death benefit payable to the 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.

The IRS doesn’t consider this type of plan 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 taxable fringe benefit.

To maximize the benefits for key employees, your company can revise its group term plan so that 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. Those employees don’t owe income tax or FICA tax on any part of the coverage.

Key points: If a key employee covered under the informal plan dies before retirement, his or her beneficiaries must pay tax on the benefits above the $50,000 cap. But there’s no FICA tax due on this amount.

The company can’t write off the premiums it pays on the policy, but it can deduct the death benefit paid to the beneficiaries.

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