Most closely-held business owners are on a constant search for tax leverage with regard to fringe benefits for the owners and their employees.
Pension plans create income tax deductions for the business, and allow employees to exclude contributions from their taxable income. However, the employer must include all eligible employees in the plan, and retirement benefits are generally taxable to the participants.
Certain nonqualified benefit arrangements can generally be more selective in terms of participation, but the income tax results are generally not as favorable—especially for the business owners.
Disability income insurance coverage provided by the business can also be selective, and the premium can be deductible. However, the owner-employee with disability income coverage must generally choose between excluding the premium from income or getting a tax-free benefit in the event of a claim.
Could the best employee benefit be a long-term care insurance (LTCi) plan?
C corporation employers have the greatest number of potential advantages for implementing LTCi plans for their employees.
- The premium is deductible by the corporation.
- There is no practical limit to the amount of premium that can be paid by the employer for an employee’s policy.
- The company can pick the employees to be covered by the plan.
- The premium paid by the corporation is not included in the employee’s taxable income.
- The benefits paid to the insured are tax free.
- Spouse and dependent family members of participating employees may also be included under the plan.
Most of the advantages described are also available to the owners and employees of S corporations, LLCs, partnerships or proprietorships.
For entrepreneurs who have employees nearing retirement, or whose key employees have aging parents, long-term care insurance may be perceived to have high value. LTCi helps pay for costs associated with chronic illness that, in most cases, Medicare or Medicaid won’t.
The federal government has strongly encouraged business owners to provide LTCi plans to employees, even in some cases if those covered are only the group of owner-employees. LTCi plans are worth considering by closely-held business owners.
As always, please feel free to call to discuss these or other financial security issues of concern.