1. ©2015, College for Financial Planning, all rights reserved. Session 16 Employee Benefits: Group Life Insurance and Disability Taxation CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

2. Session Details Module9 Chapter(s)1, 4 LOs9-2 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

3. The Cost of Employee Benefits 2013 costs of employee benefits from Bureau of Labor Statistics: Benefit Average cost per hour % of compensation Civilian Employee Benefits - All $9.4830.8% Government Employee Health Insurance $4.8611.7% Government Employee Benefits - All $14.6535.3% 16-3

4. 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

5. 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

6. 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

7. 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 fewer o 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

8. 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

9. 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 Universal 16-9

10. Group Life Insurance Coverage TypeDescription 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

11. Income Tax Implications of Group Term Life Insurance Cost of Coverage Up to $50,000Cost 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

12. Table I Rates Age of Employee Cost per $1,000 per month Age of Employee Cost per $1,000 per month Under age 250.0550-540.23 25-290.0655-590.43 30-340.0860-640.66 35-390.0965-691.27 40-440.1070 and over2.06 45-490.15 16-12

13. 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: 16-13

14. COBRA Qualifying Events Qualified beneficiariesQualifying eventsLength of coverage Covered employeeVoluntary or involuntary termination 18 months Change from full-time to part-time status 18 months Disability (S.S. definition)29 months Plan termination36 months Spouses and other dependents Employee’s Death Divorce Legal separation Eligibility for Medicare 36 months Children of employeesLoss of dependent status36 months 16-14

15. 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

16. 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 machine o Occasional tickets for business purposes o Qualified transportation allowances up to $250 per month Meals and lodging furnished for employer’s convenience 16-16

17. 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

18. Practice Problem 1 Bill 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

19. ©2015, College for Financial Planning, all rights reserved. Session 16 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits