WOMAN: With the group insurance, is that up to $50,000 per death benefit? So could you buy 10 policies, each for $50,000?
MR. WATSON: No. $50,000 total. And, we are talking about the premium for the $50,000. It's a group policy.
- The Business can buy up to $50,000 on each employee.
- The business deducts the premium.
- The employee DOES NOT claim the PREMIUM as income.
Elizabeth, you name your husband, your kids, whomever as beneficiary. The business cannot be a beneficiary. The business is paying for it, giving you a benefit. And the premium for that $50,000 is tax-deductible by the business but not included in the employee's income.
ALL: Okay.
A note: Generally, if something is tax deducted, someone is going to be taxed on the benefit. Ex. the business pays the employee a salary, they take a tax deduction on the salary but the employee must claim that salary as income and pay taxes. If the business paid for a trip that you had won, they would deduct the cost of the trip but you would have to claim the monetary value of the trip as income. Uncle Sam is going to get his money. The above example is an exception to this rule.
MR. WATSON: Guys, if I gave Elizabeth a $300 bonus at Christmas, would she have to claim that as income?
ALL: Yes.
MR. WATSON: But, If I provide you with $50,000 of insurance, I get to tax-deduct the premium for it. You do not have to claim it as income. It is an exception.
MR. WATSON: I use this $300 to buy Elizabeth and you and you and you, all of my employees, group life. I am paying a premium of $300 per person. I get to tax-deduct it on the business's tax return. Y'all agree?
ALL: Yes.
MR. WATSON: You do not have to claim it as income.
ALL: Right.
MR. WATSON: But if I provide you with any amount of insurance above $50,000, the premium for that is included in your income.
MAN: I'm lost.
MR. WATSON: Look at the chart. Let's say I'm paying $450 on your behalf for $75,000 of insurance, total. For tax purposes, we break that down as follows: $300 for the first $50,000 of insurance, $150.00 for the next $25,000 of insurance. For how much insurance total? $75,000.
MR. WATSON: I'm tax-deducting how much? $450. How much do you have to claim as income? $150. Here's the deal. The premium which represents the first $50,000 ($300) is not included in your income. It's tax-deductible by the business. Any premium that represents the amount of insurance above $50,000 is included in your income. How much am I tax-deducting?
MAN: $450.
MR. WATSON: How much do you have to claim as income?
MAN: $150.
MR. WATSON: So if you made $30,000 last year, you have to add that $150 on. So your total income is going to be $30,150.
MR. WATSON: The premium for the cost of the first $50,000 is not included in the employee's income. Does that make sense? The premium for the first $50,000 is deductible by me, but not included in your income.
When the employer pays the entire premium, it is called a non-contributory plan because the employee is NOT contributing, or paying, towards the cost of the premium. With a contributory plan, the employer AND the employee both contribute to the cost. Either way, the employer, the business, can deduct their portion of the premium.
MR. WATSON: Now, do I want to discriminate?
ALL: No.
MR. WATSON: Some businesses would like to discriminate! Am I talking sexual or racial discrimination? No. I'm talking about employee discrimination. Some businesses want to discriminate in favor of my highly paid employees.
MR. WATSON: Here's my key employee. She makes me a lot of money. I would like to do certain things for her and not do them for others as an incentive to keep her employed by me. With retirement plans, you can't discriminate. If I do something for my key employee I must do it for my non-key employees. If the business receives the blessing from the IRS - and the blessing is the ability to take the tax deduction - then you can not discriminate.
MR. WATSON: Just know the bullet points. So the IRS is going to put this to a test to prevent discrimination. Here's the test. The plan
- must cover at least 70 percent of all eligible individuals, or
- 85 percent of those participating cannot be key employees.
WOMAN: So by that figure, that's saying you don't have to insure all employees, just most of them?
MR. WATSON: Well, you tell me. If I had 100 people, how many would I have to cover?
WOMAN: 70.
MR. WATSON: 70 of them. Or, if the business was covering only 50 of the 100, 85% of those 50 could not be key employees. How many could not be key employees?
WOMAN: 85 per cent of 50?
MR. WATSON: Correct. Could not be key employees. 85 percent of them could not be key employees. 85% of the 50 that are covered. You understand?
WOMAN: Sort of.
MR. WATSON: These are just federal rules to prevent discrimination. We are concerned with discrimination, preventing a business from just covering the elite. This law is to prevent the business from only covering the highly paid people. This is designed to make sure that the business covers the rank and file also. So to do that, they have a 70/85 rule. I have to cover 70 percent of all eligible individuals or however many I cover, 85% can not be key employees.
MR. WATSON: In this case of 100 people, 70 percent of them would have to be covered. Or, if I cover fewer than that, 85% of however many I cover could not be key employees. That means if we were covering 50 people, only how many could be key employees? About 7.
MR. WATSON: So what would we have to do if we wanted to cover more key employees? We would have to cover more people. What's the purpose of these participation standards ?
WOMAN: To stop discrimination in the workplace when it comes to group insurance.
MR. WATSON: Now, if these requirements are not met, then the premium for the first $50,000 of insurance (which normally would NOT be included in the employee's compensation) WOULD be included in the KEY EMPLOYEE's income, but not the rank and file employee's income.
A note: Again, make sure you understand the above. Always remember to email, text, or call when you have a question.