Offering long term care insurance is becoming an even better way for owners of small businesses to reward key people and retain their loyalty.
A good benefit program for key employees at small businesses should meet at least 3 requirements:
1. It should be deductible for the employer.
2. It should not generate additional taxable income for the employee.
3. It should be customizable by the employer.
Some of the usual executive benefits may be less appealing than they used to be. The split-dollar landscape has changed. Corporate-owned life insurance policies have enjoyed the scrutiny of Congress recently, and deferred compensation plans may be the subject of legislative action in the near future. Qualified plans are attractive, but must comply with specific government regulations.
Fortunately, long term care insurance still meets the requirements for a good executive carveout benefit.
Tax-qualified long term care insurance occupies a special place in the tax code. When an employer buys coverage for selected employees, the employer might be able to deduct the premium payments. Employer-paid premium does not generate additional taxable income for the employee even though the employee is the owner of the LTC policy.
Benefits from the tax-qualified LTC policy paid to the employee are likewise tax-free. The same results apply to a tax-qualified LTC policy purchased by the employer for the employees spouse. There are not many products with as many tax advantages as tax-qualified LTC insurance.
A tax-qualified LTC policy can be a limited-pay policy, or it can be continuous pay. A limited-pay policy, which is paid up after a fixed number of years or at age 65, is appealing to an employer because it has a preset cost payable over a determinable period of time.
Usually, the premium is somewhat higher on a limited-pay policy, which generates a larger tax deduction for the employer. When employees retire, they may receive paid-up LTC policies instead of the traditional “gold watch.”
A benefit plan for key employees that uses tax-qualified LTC insurance offers another appealing feature: flexibility.
The employer can, for example, decide that only employees above a certain level who have been employed by the employer for a specified number of years will be eligible to participate.
Perhaps the employer wants each participant to qualify in some way each year for continued premium payments. The employer can encourage a specific level of productivity by agreeing to buy an LTC policy only for employees who meet certain performance standards.
Lets look at an example. Al has been a loyal employee of PQR for many years. PQR has implemented a plan whose goal is to increase production by 10% by the end of the current year. If this goal is achieved, those employees at Als level within the company will receive an employer-paid tax-qualified LTC policy.
Al meets the goal and receives the LTC policy. PQR pays the annual premium and is entitled to a tax deduction for the premium paid. While Al does not recognize additional taxable income, he is the proud owner of the LTC policy. Benefits he may receive in the future will not be subject to income tax. Premiums will continue to be paid by the employer as long as Al remains with PQR and continues to maintain the increased level of productivity.
In this example, PQR can be any type of business entity. It can be a C corporation, an S corporation, a partnership, a limited liability company or a limited liability partnership.
The premium paid by the business for an LTC policy owned by one of its employees is tax deductible for the business as an ordinary and necessary business expense. The premium is not taxable as income to the employee. If the employee had an ownership interest in the company and the company was a pass-through entity (e.g., an S corp or a partnership), the premiums paid would be eligible for the self-employed health insurance deduction.
The maximum LTC premium deduction would be $980 for an employee with an attained age of 51 to 60 in 2004.
PQR had control over who could or could not participate in the program. The parameters of the plan were designed by the company to meet its needs. Ultimate control rests with the employer.
Seldom does an executive benefit plan come along which offers so many advantages and so few disadvantages. This is a plan that can be customized to fit an employer’s specific criteria, and it offers a tax deduction for the employer without creating additional taxable income for the employee.
Note: GE Financial, its affiliates and representatives do not provide tax advice. The discussion of tax matters in this material is GE Financials interpretation of current tax law and is not intended as tax advice. The clients of a financial advisor should consult a tax professional for information relating to their particular situations.
is an executive in the advanced marketing department of GE Financial.
Reproduced from National Underwriter Edition, April 19, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.