January, 2007
New Tax Trap for Employer-owned Life Insurance
January, 2007
New Tax Trap for Employer-owned Life Insurance
From a tax standpoint, it's a good deal: Life insurance proceeds can generally be received by the policy beneficiary income-tax free. Prior to passage of he Pension Protection Act of 2006 (PPA), this favorable tax treatment was available to employers that received death benefits from insurance policies purchased on the lives of their employees.
But no longer. The PPA has created a brand new section of the tax code that could create a trap for companies that own insurance policies purchased to fund buy-sell agreement, to secure new loans, provide funds in the event of a key person's death, or for other reasons.
It's Income . . . Unless various requirements are met, companies will now have to report the proceeds received from employer-owned life insurance policies issued after August 17, 2006, as ordinary income, except to the extent of the amount the company paid in premiums.
Unless It's NotCompanies can maintain income-tax free status for the proceeds of certain employer-owned policies by complying with notice and consent requirements. This exception is available for policies covering individuals who were employed at any time during the 12 months prior to death. It's also available for coverage on individuals who, at the time the insurance coverage became effective were:
If requirements are met, income-tax-free treatment is also available for insurance benefits:
Notice and Consent You'll want to make sure you provide sufficient notice to and receive written consent from employees you are planning to insure before any new contract is issued. You'll also need to file an annual return with the IRS. If you'd like to discuss the new rules, let us know.
Pension plan benefit and contribution limits are reviewed every year and adjusted as necessary to account for increases in the cost of living. Here are the figures for the 2007 tax year.
As you welcome the new year, you're probably not thinking about the many ways that life could take a turn for the worse. But it could. An illness, a natural disaster, or an unexpected financial setback are only some of the events that could disrupt your life and your finances. Here are some proactive steps you should take - just in case.
Build a Cash Stash Having an emergency fund can be a big help in a crisis. How much should you have saved? As a general rule, you should have enough to cover at least three and as many as nine months' worth of expenses. Consider keeping your cash in a savings or money market account. While the interest these accounts offer may be relatively low, their liquidity is a big plus.
Peruse Your Policies Insurance is another way to protect yourself. Make sure your car, home, medical, and life insurance policies provide sufficient coverage. Disability insurance that would provide income in the event you aren't able to work is another safeguard worth considering. Review your coverage on a regular basis, especially if you've experienced a life-changing event, such as a marriage, a divorce, or the addition of a child.
Look Into Loans If you own a home, consider applying for a home equity line of credit as an extra safeguard. You don't have to use the money unless you need it, so it may be smart to apply now while you are employed and healthy. If you do tap into your line of credit, the interest on up to $100,000 of home equity debt is potentially tax deductible.
Be Prepared Professionally It's always a good idea to keep your resume up to date - just in case. Establish and maintain a group of friends, associates, and key contacts who could help you in your search for a new job, should that be necessary.
Arrange Your Records Gather all your important personal information together and store it in a safe place. Include a list of financial accounts (bank, savings, investment, and retirement) with access information (such as PINs and passwords). Safe deposit box keys, insurance policies, and contact information for your professional advisors should be in the same spot.
There's some good news on the health insurance front. The rate of increase in premiums for employer-sponsored health insurance is dropping. Unfortunately, that rate is still m ore than double the rate of inflation.
The Numbers Are In According to an annual survey on health benefits,* premiums for employer-sponsored health plans increased an average of 7.7% from spring 2005 to spring 2006. That's better than the 9.2% increase in premiums recorded a year earlier and well below the 11.2% jump from two years ago.
A look at the underlying numbers reveals more good news: 42% of covered workers are in plans that experienced premium increases of 5% or less. However, 13% are in plans with premiums that increased more than 15%. Overall, self-funded employer health plans fared somewhat better than the fully insured plans (6.8% premium-equivalent increase compared to 8.7%).
Overall, 61% of the employers surveyed offer health benefits. On average:
The more employees a company has, the more likely it is to provide health benefits.
*2006 Employer Health Benefits Survey, the Kaiser Family Foundation and the Health Research and Educational Trust
They may not fit with your decor or match your color scheme, but you have to use them anyway. We're talking about the posters that the federal government requires businesses to display in the workplace to explain various employer and employee rights.
The posters are free from the government, although you might prefer to find a commercial vendor that can combine several posters into one. As for which posters you need to display, that depends on the nature and location of your business, how many employees you have, your annual dollar volume, and whether you have federal contracts or subcontracts. To find out more, go to the U.S. Department of Labor's website at www.dol.gov/elaws/posters.htm and follow the instructions.
Don't forget about state and local labor laws. You may need to save some wall space for them, too.
With the number of available exchange -traded funds (ETFs) well over the 200 mark, they aren't exactly the "new kid" on the investment block anymore. How much do you know about ETFs?
Some Similarities ETFs are similar to mutual funds in some ways. They are both investment companies that hold a "basket" of securities. Like index mutual funds, most ETFs are passively managed funds that invest in the stocks or bonds making up a specific market index.
Some Differences Unlike shares of mutual funds, which are usually purchased or redeemed based on a fund's net asset value (NAV) determine at the close of trading each day, shares of ETFs are traded throughout the day at prices determined by the market. This feature may be attractive to active traders.
ETFs generally have no minimum investment requirements, and fees are relatively low. Trading costs are a factor, however, since ETF shares are typically available only through a broker. Investors who reinvest their dividends or purchase shares every payday should consider these costs before investing in an ETF.
The Deal Breaker? From a tax standpoint, ETFs may have the upper hand. Why? Mutual funds must contend with investor redemptions. So a fund's manager may have to sell some of the fund's securities to get cash to buy back shares from investors who want to sell. This often results in taxable capital gains that must be distributed to the fund's remaining investors.
In contrast, when average investors sell ETF shares, they are purchased by other ETF investors, so the fund doesn't have to sell securities to meet redemptions and investors are protected from the resulting taxable distributions. Capital gains realized when investors sell their ETF shares at a profit are taxable, however.
Acme Company sponsors a 401(k) retirement plan for its employees. The company has decided to evaluate the costs and features of its plan to see if improvements can be made.
The 401(k) industry continues to change, so Acme is smart to take a look at its options. Some plan sponsors take the one-stop shopping approach and used "bundled" services from single providers that include investment management, plan administration, and trustee services. Other employers use separate providers to perform these services.
Even relatively small percentage differences in plan operating expenses can have a big impact. To evaluate how its costs compare to other plans, Acme can conduct a benchmarking study. A review of plan investments is also in order.
Offering features that employees value can help boost overall plan participation, so Acme will want to review those, as well. One option it may want to consider is the relatively new Roth 401(k), which was made permanent by the 2006 tax law. Similar to a Roth IRA, a Roth 401(k) account accepts after-tax contributions instead of tax-deferred contributions. Investment earnings accumulate tax free, just as they do in a traditional 401(k) account. However, as long as certain requirements are met, Roth 401(k) account earnings are not taxable when distributed.
As an employer, you want to make the most of the money you spend on employee benefits. If you would like our professionals to help you evaluate your benefit programs, please let us know.
The Social Security Administration has announced that the taxable wage base for 2007 in $97,500 (up from $94,200 in 2006). Wages above that cap are not subject to Social Security tax. However, all wages are subject to Medicare tax.
According to the Bureau of Labor Statistics (June 2006), U.S. private industry workers earn an average of $17.77 per hour. Employers pay an average of $0.91 per hour to provide retirement and savings benefits. Add in paid leave, insurance, supplemental pay, and legally required benefits and the price tag jumps to $7.39 an hour.
The average amount accumulated by long-term 401(k) participants (those who have been in a plan for at least six years) has broken into six-figure territory for the first time. A recent study reports the average account balance for the group was $102,014 at the end of 2005.
The 2007 threshold for the "nanny tax" remains at the 2006 level of $1,500. Wages paid to a worker who performs domestic service in a private home are not subject to FICA taxes unless they reach that amount.
Question: Our son is going to start college this fall. Can we file his FAFSA (Free Application for Federal Student Aid) before we file our federal income-tax return?
Answer: Yes. You can file a FAFSA for the 2007-2008 year as early as January 1, 2007, using estimated income and tax information for 2006. Then, when you file our 2006 income-tax return, if the tax and income amounts differ from the estimates, amend your FAFSA.
Question: My father was recently disabled. He lives with my wife and me in the two-story home we bought a year ago. If we sell it and buy a ranch house to accommodate my father, will we qualify for any tax break on any gain on the sale?
Answer: If you stay in your home for at least two years before selling it (and file a joint tax return with your wife), you can exclude up to $500,000 of gain on the sale from your income. If you sell before the two-year period is up, you may still the eligible for an exclusion if the primary reason for your move is your father's health. However, the maximum exclusion would be less than $500,000.