Pre-Tax or Taxed in Group....

I am looking at offering DI for Individual and Group. (Currently do ind. health and life). Wanted to get a feeling for the tax considerations for DI, as I know they are different when comparing to life insurance.

1) Group DI as a payroll deduction before taxes and if a claim is made benefits NOT TAXED??

2) Key Man DI... Written off as business expense.... Claim payment TAXED or NOT TAXED.?? Please comment.

3) Individual purchase before tax..... if claim is made benefits NOT TAXED??

Thank for comments on clarity for these concepts.
 
I am looking at offering DI for Individual and Group. (Currently do ind. health and life). Wanted to get a feeling for the tax considerations for DI, as I know they are different when comparing to life insurance.

1) Group DI as a payroll deduction before taxes and if a claim is made benefits NOT TAXED??

2) Key Man DI... Written off as business expense.... Claim payment TAXED or NOT TAXED.?? Please comment.

3) Individual purchase before tax..... if claim is made benefits NOT TAXED??

Thank for comments on clarity for these concepts.

______

I can answer your questions as posed, but I think it would be beneficial to have a discussion about it which goes WAY BEYOND the questions you posed.

In regards to both Individual DI products and Group DI products, it is possible to have a choice about taxation, and it is NOT determined solely by product. The taxability of a benefit is NOT determined by whether it is group or individual. One thing to remember is the basic rule that you cannot expect to have no tax due on premium and also get the benefits tax-free. The IRS is going to get its portion, one way or another. That being said, there are times that you have a choice....make the premium be taxed or have the benefit be taxed.

IF an individual pays his own premium, and does so with AFTER-TAX INCOME, then the benefit if paid would not be taxable. IF the individual has his premium paid by an employer, and the premium is treated as a business expense and deducted, the benefits would be taxable. You could however, also do it like a Section 162 plan, and have the premium pass through as income to the employee, in which case the premium would be taxable and the benefits would be tax-free. This is often called a gross-up plan in the group world, and it can be done to also add enough income to include enough to pay the tax. It is also possible to run a DI policy through a S. 125 plan, but that makes the benefits taxable.

Owners of Partnerships, Single Member LLC's, and "S" corps do NOT have the ability to deduct the premium per IRS rules. Their only option is to pay premium after tax and receive tax free benefits. That doesn't mean some don't try to deduct it, but the rules are pretty clear.

Some products DO NOT have the ability to have the premium be deductible, and others do. For example, you did not ask specifically about Business Overhead coverage, but the premiums are deductible as a business expense, and the benefits when received are taxable. However, that taxable income of the policy benefits is also washed out by the deductibility of the underlying expenses that are being reimbursed by the policy.

I can provide you a booklet or chart which summarizes all types of policies and the deductibility options by premium payer along with the tax treatment of the benefits. Just send me a message to [email protected] and I'll respond with the data.

Good luck.
 
Great question and great answer. Thanks for the info. I was needing a bit of an explanation too, although I only do individual. I always have thought of it as if employer pays premium then benefit is taxed. If individual pays own premium with after tax dollars, then bennie is not taxed.

I didn't know about the section 162 plan and having the premium passed through as taxable income. Extremely informative. thanks so much even though I didn't ask the question. :)
 
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