Tax Implications of Section 162 Plans

There are several tax implications to the Section 162 plan. Understanding these implications are important, as it will help the consumer make a wiser policy and financial decision. The tax implications of a Section 162 plan include the following:

  1. Payments made as a bonus to an employee, whether made directly by the employer to the insurer, or from the employer to the employee and then from the employee to the insurer, are currently deductible by the employer6 even if the employer derives an indirect benefit such as the enhanced morale or increased efficiency of the employee.7
  2. The entire bonus (premium) is reportable as income by the insured.8
  3. If the employer pays premiums directly to the insurance company, the payments will probably be considered a non-cash fringe benefit for withholding purposes. Thus, the premiums should be added to regular cash wages paid during the year and the appropriate withholding adjustment made. In other words, employer payments of premiums are subject to both Social Security (FICA) tax and Federal Unemployment Tax (FUTA).
  4. Since the employee has already paid tax on the full cost of the policy, he or she has a cost basis equal to the sum of all premiums paid by the employer. This basis, or investment in the contract, can be used to offset income tax as amounts are withdrawn or when the policy is surrendered.

Learn more about Section 162 Plans here.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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