Supplemental insurance plans can include a wide range of insurance coverage. And they are tax deductible for your business and excluded from your key employees’ income. Altogether, by offering all or some of these benefits, you can provide important supplemental benefits that will help you attract and retain key employees, and do so in a tax-effective way.
You can provide income tax-free health insurance benefits for key employees on a discriminatory basis (i.e., not provided to all employees). The business pays the premium and receives a tax deduction, and the premium is excluded from the key employee’s income. The same IRS rules that cover deferred compensation (IRC section 409A) apply here.
You can pay for long-term care insurance for key employees who are 50 and older. They can use the benefits to pay for the cost of a nursing home, assisted living, or at-home care during retirement. As with health insurance premiums, these premiums are excluded from employee income. And benefits are income tax-free when applied to the insured employee.
You can also buy disability insurance in the same way – on a discriminatory basis – for your key employees. These are taxed differently than health insurance and long-term care coverage. The business deducts the premium. Then, depending on how the plan is structured, either the premiums are considered as taxable income for the employee and the disability benefit payments are income tax-free, or the premiums are tax-free and the disability benefit payments are taxed when received.
The use of life insurance as a non-qualified benefit can be complex. Life insurance could be part of a bonus plan, deferred compensation, “split dollar” plan, or other financing arrangements. This insurance can supplement or replace other insurance.