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September 08, 2004 at 08:00 PM
Sometimes everything old is new again. This certainly holds true in the insurance business, as tried-and-true ideas come into their own again.
Such is the case with group carve-out plans for nonqualified employee benefit arrangements. Given the continuing squeeze on qualified plans and executive compensation programs, group carve-outs may be worth taking another look at.
A group carve-out program works just as it sounds: Key executives are “carved out” of the group life insurance plan and benefits above $50,000 are replaced with permanent individual life insurance policies.
Generally, federal law allows up to $50,000 of group insurance coverage tax-free to the employee. However, coverage above $50,000 results in taxable income to the employee based upon current Table I rates.
It is important to note that the tax advantages of group insurance are not available for stockholder-employees who own more than 2% of the company stock, partners of a partnership or the sole proprietor.
An employer may want to use the group carve-out method to:
? Control total employee group life insurance benefit costs;
? Secure flexibility in the amount of insurance offered;
? Reduce government reporting;
? Be selective in offering benefits;
? Retain key executives (a.k.a., using “golden handcuffs”); and
? Remove high limits that lead to a reduction in group costs.
There are also clear advantages for key executives, including:
Life insurance benefits that continue after retirement;
The elimination of Table I income taxes on group benefits over $50,000;
Cash values that accumulate tax deferred;
