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Business Insurance Guide

                                                                                                   

  INCOME TAX ASPECTS  
PLAN OBJECTIVE  PREMIUM PAYOR OWNER BENEFICIARY BUSINESS EMPLOYEE DECEASED'S FAMILY ESTATE TAX ASPECTS
Traditional Individual Retirement Annuity (IRA) Provide retirement benefits. Current tax deduction. Tax-free buildup. Individual or individual's spouse. Annuitant. As designated by the individual.  

Individuals who are ot active participant in an employer maintained plan can make deductible contributions up to $2,000. Special limiting rules apply to others.

IRA distributions are taxed as ordinary income.  A spouse can roll-over the IRA into his or her own IRA IRA proceeds are subject to estate tax.
Group Life Provide life insurance death benefit for employee's family. Business. Business As designated by covered employee. If plan is discriminatory, key employee must include cost of group life insurance in taxable income. Employer-paid premiums in non discriminatory plans not taxable income up to $50,000. Cost of coverage in excess of $50,000 is taxable income. Proceeds normally not taxable. Proceeds included in employee's gross estate, unless an absolute assignment of all incidents of ownership has been made more than 3 years before death.
Medical Expense and/or Mayor Medical Provide basic and/or more extensive coverage for hospital, surgical, and other medical expenses incurred due to sickness or accident. Business Business Covered employee. Premiums deductible. Employer-paid premiums not taxable and benefits not taxable. Insured medical******    
Section 162 Plan Retention of key selected employee by providing life insurance and retirement benefits. Business Covered employee. As designated by covered employee. Premiums deductible. Employer-paid premiums considered taxable income. Benefits not taxable (except gain under living proceeds). Proceeds not taxable. Proceeds included in covered employee's gross estate due to policy ownership.
Qualified Pension Plan Provide retirement benefits for employees, including stock-holder-employees, on a tax favored basis. Business. Trust-Vesting schedule determines covered employee's ownership rights. As designated by covered employee, subject to qualified join & survivor and pre-retirement survivor annuity requirements, including consent of spouse. Contributions deductible provided they meet the "reasonable compensation" test of the Internal Revenue Code and do not exceed the limits of Code Section 415. Employer contributions not considered taxable income, except one-year term cost of insurance protection.  Income taxes are deferred until benefits are received.  Employee contributions (including PS 58 costs) are recovered income tax free. Employee contributions (including PS 58 costs), and any net insurance protection received tax-free. Life insurance proceeds and present value of annuities are subject to estate tax.
Qualified Profit Sharing Plan Provide for employees, including stockholder employees, to share in the profits of the business on a tax-favored basis. Business. Trust Vesting schedule determines covered employee's ownership rights. As designated by covered employee, subject to qualified joint & survivor annuity and pre-retirement survivor annuity requirements, including consent of spouse. Contributions up to 15% of compensation are deductible each year.  Maximum annual contribution per employee is $30,000. Employer contributions not considered taxable income to employee, except one-year term cost of insurance protection.  Income taxes are deferred until benefits are received. Employee contributions (including PS 58 costs), and any "net insurance protection" is received tax-free. Life insurance proceeds and present value of annuities are subject to estate tax.
Business Continuation -Cross Purchase Disposal of business interest upon death of an owner, by transferring ownership to surviving co-owners who continue business. Each partner or stockholder pays premiums for policy on the life of  partner(s) of co-stockowner(s). Each partner or stockholder owns policy on the life of partner(s) Each partner or stock-holder is beneficiary of policy he owns on life of partner(s) of co-stock owner(s). Proceeds used to buy interest from deceased owner's estate.   Premiums not deductible-Proceeds not taxable "Step-up" in basis usually applies, if payments do not exceed stepped-up basis, there is no tax. Purchase price paid for deceased's business interest is included in the gross estate.  This usually equals amount of policy proceeds.
Business Continuation-Stock Retirement of Entity Disposal of business interest upon death of an owner, by having business purchase deceased's interest. Business. Business.  Business-Proceeds used to buy interest from deceased owner's estate. Premiums not deductible-Proceeds not taxable   "Step-up" in basis usually applies, if payments do not exceed stepped-up basis, there is no tax. Purchase price paid for deceased's business interest is included in the gross estate.  This usually equals amount of policy proceeds.
Partial Stock Redemption under Section 303 of the Internal Revenue Code Transfer stock-owner's interest at stockowner's death to his or her heirs, and have partial stock redemption, providing estate with cash to pay settlement costs. Corporation.  Corporation. Corporation. Proceeds are used to purchase stock from estate of deceased stockowner in an amount not exceeding estate settlement costs. Premiums not Deductible. Proceeds not taxable   "Step-up" in basis usually applies, if payments do not exceed stepped-up basis, there is no tax. Payments received by estate in exchange for stock not included in gross estate, but value of decedent's stock will be.
Key employee life insurance Provide protection to offset  loses to a business due to death of possible employees Business Business Business proceeds offset reviews profits and help pay for replacement upon key employee death Premiums not deductible.  Proceeds not taxable. No impact. No impact. proceeds not taxable but to value of business is in courteous to those in the estate
Disability income for key employees  Provide salary continuation  plan for selected employee during period of disability. Business Covered employee. Covered employee -- benefits offset salary lost while unable to work Premiums deductible. Employer -- paid premiums not taxable income -- benefits taxable.   No  impact.
Split Dollar (conventional method) Retention of key selected employee by helping him or her purchase life insurance at relatively low cost. Business pays portion of premium equal to increase in cash value.  Key employee pays balance. Corporation or insured or third party. Business collects amount and equal to policy cash value-- Balance of proceeds payable to key employee's beneficiary. Premiums paid are not deductible unless bonused to employee.  Proceeds received are not taxable. Taxed on economic benefit received as a result  of employer paid premiums. Proceeds are not taxable. Proceeds received are included in employee's gross estate, due to incidents of ownership, E. G., right to designate and change beneficiary.
Nonqualified Deferred Compensation

 

Retention of key executive by deferring taxable income and providing salary continuation plan. Business  Business Business.  Proceeds used to fund key executive's salary continuation plan. Premiums not deductible.  Proceeds not taxable (except taxable gain under leaving proceeds.) Benefit payments deductible if reasonable compensation. Employer -- paid premiums not treated as taxable income.  Taxes deferred until executive receives benefits, which are considered ordinary income. Benefit payments taxable as ordinary income when received. Commuted value of benefit payments into dead in executives cross estate.

 

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Copyright 2001 Kaplan Management & Insurance Services
Last modified: June 13, 2012