Advanced Underwriting Consultants

Question of the Day – January 31

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can the owner of a C corporation realize any tax advantages by running the premium for a qualified long term care policy through her business?

Answer: Yes.  Qualified long term care contracts are generally treated as health insurance for the purpose of the rules.

C corporation employers have the greatest number of potential advantages for implementing LTCi plans for their employees.

1. The premium is deductible by the corporation. LTCi premiums payable by a company are deductible as ordinary and necessary business expenses under Code Section 162.

2. There is no practical limit to the amount of premium that can be paid by the employer’s for an employee’s policy. The amount of premium that a business contributes to LTCi on behalf of an employee is virtually unlimited—subject only to the idea that the employee’s overall compensation package is reasonable.

3. The company can pick the employees to be covered by the plan. Health plans provided by an employer through insurance coverage do not need to follow the nondiscrimination rules of Section 105(h) of the Code.  Code Sections 105 and 106 make reference to health plans sponsored by an employer.  Treasury Regulations Section 1.105-5 provides

a plan may cover one or more employees, and there may be different plans for different employees or classes of employees.  An accident or health plan may be insured or noninsured, and it is not necessary that the plan be in writing or that the employee’s rights to benefits under the plan be enforceable.

4. The premium paid by the corporation is not included in the employee’s taxable income. Code Section 106 says that the premiums paid by an employer to a health plan are not included in the employee’s taxable income.

5. The benefits paid to the insured are tax free. Section 105(b), however, provides that an employee does not have to include in taxable income most payments received for medical care, as defined in Code Section 213(d).  Section 213(d) says benefits paid under a tax-qualified LTCi contract are payments for medical care.

6. Spouse and dependent family members of participating employees may also be included under the plan. Section 105(b) of the Code allows employers to include spouses and income-tax dependents of participating employees within the scope of a health plan.  Since LTCi plans are health plans for the purpose of Section 105(b), that means that the spouse or income-tax dependents of a participating employee can also be included in the LTCi plan so long as the employer permits.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – November 8

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client’s CPA says that my client’s business can take a deduction for the life insurance premium if the client is willing to get a taxable death benefit.  Is that true?

Answer: No.

The premium for business life insurance is not deductible for the business, nor is the premium for personal life insurance deductible personally.  See Revenue Code Sections 264 and 262.

Tax advisors sometimes confuse the rules with regard to business life insurance with the rules about disability income coverage.  The premium for disability insurance is treated as accident and health coverage.  The business and participant have the option to treat the premium as deductible by the business and non-taxable by the participant.  If the premium is treated that way, the disability benefit payable to the insured employee will be taxable.  Code Section 106 says that the premiums paid by an employer to a health plan are not included in the employee’s taxable income.  Section 105(a) states that most benefits received by an employee through accident or health insurance for personal injuries or sickness are included in gross income if the contributions by the employer were not included in the employee’s gross income.

On the other hand, the business can pay the premium as a bonus to the employee, and the employee would recognize the premium as taxable income.  If the premium is treated that way, the disability benefit would be tax free.  See Revenue Code Section 104.

We’ve heard that some CPAs recommend waiting until the end of a calendar year to decide whether to treat the disability income premium should be treated as a pre-tax benefit or a taxable bonus.  Waiting arguably allows the insured to hedge his bet about whether a disability benefit paid will be taxable or not.

The same technique does not work with life insurance because there’s no pre-tax option built into the Revenue Code with regard to the premium.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.