102-10 Biz Uses of LI and Other Emp Benefits Flashcards Preview

CFP 2 - Risk, Insurance, Emp. Benefits > 102-10 Biz Uses of LI and Other Emp Benefits > Flashcards

Flashcards in 102-10 Biz Uses of LI and Other Emp Benefits Deck (17)
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1

Key employee life insurance

Life insurance applied for, owned by, and payable to the business on the life of key valued employees (usually execs)

Premiums are not tax deductible, and death benefits received by the business are generally income tax-free

2

Split-dollar life insurance

An arrangement, typically between an employer and an employee, in which there is a sharing of the costs and benefits of the life insurance policy

Two types:
1. Collateral assignment method
2. Endorsement method

3

Collateral assignment method

Owner of policy: employee

Tax treatment of policy premiums: nondeductible

Employer’s portion of death proceeds: employer is refunded loan equal to premiums paid

Employee’s portion of death proceeds: remainder to employee’s designated beneficiary

Appropriate for situations when the exec benefiting from the plan is a majority shareholder

4

Endorsement method

Owner: employer

Tax treatment of policy premiums: nondeductible

Employer’s portion of death proceeds: employer retains a portion equal to its premium outlay

Employee’s portion of death proceeds: remainder to employee’s designated beneficiary

May be appropriate when exec benefiting from plan is not a majority shareholder

5

Disadvantage of split-dollar ownership form

The employee must pay income taxes each year on the economic benefit derived from the arrangement

6

Section 162 Executive Bonus Plan

The employer business pays the employee a bonus equal to the premiums due on a personally owned life insurance policy of the employee

Employer then deducts this premium amount as additional compensation to the employee and employee reports the amount as ordinary income

7

Death Benefit Only (DBO) plan

The employer corporation is the owner and beneficiary of an insurance policy owned on the life of a valued exec

The death benefit paid from the policy (once received by the employer beneficiary) is forwarded to the exec’s heirs in lieu of compensation that was previously deferred

The payments made to the heirs are not generally included in the gross estate for estate tax purposes
Exception: where the exec is greater-than-50% or controlling shareholder

8

Group Term Life Insurance

GTLI premiums - up to the first $50k of face value paid for by the employer, are income tax-free to the employee

For any amount > $50k, the scheduled premium per $1k of coverage is included in the employee’s compensation (W-2) income

GTLI typically includes a conversion provision to individual permanent life insurance at the employee’s separation from service w/ the sponsoring employer

9

Group permanent insurance

Policies operate essentially as individual policies with simplified underwriting, group billing, and administrative costs

When an employee leaves/retires, the group policy usually stays in force as an individual policy

The policies of terminates and retired employees are generally treated as a separate class, so only this class pays for any adverse selection

10

Group carve-out plans

Combine the advantages of group permanent insurance w/ those of GTLI

The employer reduced the amount of GTLI coverage on highly paid employees to no more than $50,000
The remainder of the benefit is then provided by permanent cash value-type life insurance owned by that same employee; however, the employer pays the premium
Because the entire premium is treated as compensation to the employee/exec, the amount is fully deductible by the employer

11

Life insurance in qualified plans

Life insurance can be provided through a qualified plan if the plan meets the incidental death benefit requirement

A plan must pass 1 or 2 tests to meet this requirement

Under the 25% test, the aggregate premiums paid for a term or universal life insurance policy cannot exceed 25% of the employer’s contributions to the plan
The % limitation is 50% when whole life insurance is used
Under the 2nd test, which applies to defined-benefit plans, the death benefit provided by life insurance cannot be more than 100x the expected monthly benefit to be paid to the employee under the plan

12

Cafeteria plan

A plan in which employees may, within limits, choose the form of employee benefits from options provided by their employer

Must include a cash option

The plan is most appropriate to implement when the employee benefit needs bath within the employee group

A cafeteria plan that is funded entirely through employee salary reductions (with no employer contribution whatsoever) - known as an FSA

May not be included in the tax-free plan:
-scholarships and fellowships
-educational assistance
-employee discounts
-retirement or nonqualifed plan benefits

13

Flexible spending account (FSA)

A cafeteria plan consisting of various tax-free benefits that are funded trough salary reductions elected by employees each year

Most appropriate when costs of employee benefit plans, such as health insurance, have increased and the employer must impose additional employee cost sharing
1. Deductibles on health insurance policies
2. Coinsurance provisions on group health policies
3. Dependent care (child care) expenses

14

Dental insurance

Normally covered on a group basis

15

Vision insurance

Covers care and treatment for the eyes

16

Prepaid legal services

A fringe benefit that makes legal services available to employees

Examples: bankruptcy assistance, adoption assistance, divorce legal fees assistance, and the preparation of estate planning documents

Employer fully pays the cost of the legal services and deducts the expenses necessary to maintain the plan

17

Voluntary employees’ beneficiary association (VEBA)

A type of welfare benefit plan into which employers make deposits that will be used to pay specified benefits in the future

Most common type of benefit included in the VEBA is a severance pay plan for selected execs