Part 4 – Business Planning with DI

Disability insurance may be one of the most underutilized employee/employer benefits. There are tax incentives to employers for purchasing disability insurance for their employees. Employers can pay for all the coverage, part of the coverage, or have employees pay all the cost. Typically employers are willing to fund part of the plan and then allow the employees to purchase additional coverage. We will discuss a couple of planning techniques in this chapter.

STRUCTURE
· Employee purchases individual policy
· Employer bonuses premium
DEDUCTIBILITY OF PREMIUMS
· Premiums deductible as compensation [IRC §162]
· Must be “reasonable” [IRC §162(a)(1)]
· Must not be “excessive remuneration” [IRC §162(m)]
TAXABILITY OF BENEFITS
· Not taxable income since premiums paid by employee [IRC §104(a)(3)]
· Not taxable even if part of a salary reduction agreement [Rev. Rul 73-347, 1973-2 CB 25]
SPECIAL CONSIDERATIONS
· If truly compensation, deductibility not limited for “self-employed” individuals
· Need does not meet non-discrimination tests

STRUCTURE
· Employee purchases individual policy
· Employer agrees to pay for portion of benefits (e.g. 2 years of benefits)
· Employee responsible for balance of premium
· Employer could bonus employee’s cost
DEDUCTIBILITY OF PREMIUMS
· Premiums bonused to employee deductible as compensation [IRC §162]
· Must be “reasonable” [IRC §162(a)(1)]
· Must not be “excessive remuneration” [IRC §162(m)]
· Employer portion deductible as health insurance premium [IRC §162]
TAXABILITY OF BENEFITS
· Benefits paid for by employee not taxable income [IRC §104(a)(3)]
· Benefits paid for by employer taxable [IRC §105(a)(2)]
SPECIAL CONSIDERATIONS
· If truly compensation, deductibility not limited for “self-employed” individuals
· Need not meet non-discrimination tests
· Employer may still deduct its payment
DEDUCTIBILITY LIMITED FOR “SELF-EMLOYED” INDIVIDUALS
2003-2005          80%
2006                      90%
2007 and after   100%

STRUCTURE
· Employer adopts a Wage Continuation Plan
· Employees purchase individual policies
· Employer agrees to pay for benefits under terms of plan
DEDUCTIBILITY OF PREMIUMS
· Employer portion deductible as health insurance premium [IRC §162]
TAXABILITY OF BENEFITS
· Benefits paid for by employer taxable [IRC §105(a)(2)]
SPECIAL CONSIDERATIONS
· May need to meet non-discrimination tests if plan considered a “self-insured medical expense reimbursement plan” {IRC §105(h)]
· Employer may still deduct its payment
· Return of Premium rider benefits not considered “wage continuation” benefits and not deductible
· Cost for Return of Premium rider may be bonused to employee
DEDUCTIBILITY LIMITED FOR “SELF-EMLOYED” INDIVIDUALS
2003-2005            80%
2006                       90%
2007 and after    100%