Announcement

Collapse
No announcement yet.

Post-tax $$$ for personal disability - tax implications if reimbursed from CME funds?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Post-tax $$$ for personal disability - tax implications if reimbursed from CME funds?

    Hello,
    For years, our group has allowed use of CME funds to reimburse medical expenses such as books, courses, etc, but also allows us to use CME funds to reimburse personal disability insurance policies. A colleague recently pondered if there are any tax implications for this scenario. I know that post-tax premiums = tax-free benefits, where as pre-tax premiums = taxed benefits. But what about the scenario where a physician pays out of pocket for his personal disability policy, but she/he is later "reimbursed" from his/her CME allowance?

  • #2
    At claim time, it is asked if you deducted or were reimbursed your disability insurance premiums, if the answer is yes then the benefits are taxable. It really comes down to you and your CPA deciding on how you want to play that game. Reimbursed during the same year, absolutely not, post 1 year then I have seen attorneys write up disability reimbursement plan documents that can sometimes find the right path for doing what you are asking. Document, Document and Document some more....
    Scott Nelson-Archer, CLU, ChFC
    303-953-0263 Direct / [email protected]

    Comment


    • #3
      Several years ago, WCI responded to a post on this scenario that he would always choose pre-tax over post-tax DI premiums. I presume that was b/c the odds of needing the policy are relatively rare as compared to the ability to deduct. This made an impression I have never forgotten, as most CPAs (self included) tend to promote the benefits of “free” disability income. When you are receiving them, yes, it is wonderful to have tax-free income. However, getting to deduct those high premiums over your career (if you are one of the few afforded the ability to do so) then never needing the policy is preferable and far more likely than getting taxable LTDI bene’s.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4
        I would also have the group look into whether this is a good idea. I think what can be used for CME has narrowed recently and I’d be surprised if a disability policy being reimbursed as CME is good practice.

        Comment


        • #5
          Originally posted by jfoxcpacfp View Post
          Several years ago, WCI responded to a post on this scenario that he would always choose pre-tax over post-tax DI premiums. I presume that was b/c the odds of needing the policy are relatively rare as compared to the ability to deduct. This made an impression I have never forgotten, as most CPAs (self included) tend to promote the benefits of “free” disability income. When you are receiving them, yes, it is wonderful to have tax-free income. However, getting to deduct those high premiums over your career (if you are one of the few afforded the ability to do so) then never needing the policy is preferable and far more likely than getting taxable LTDI bene’s.
          I agree but there are several things that need to be taken into account as well. As an example, if it takes you $10k to run your life thus the need for disability is $10k if you have a tax free policy then you simply buy a $10k policy. If it is going to be a taxable benefit then one would need to buy $12,500 +/- to net out the taxes and thus have a $10k benefit to spend. By doing the tax deducted premium you do get the tax deduction but you are now buying 25%+/- more benefit.

          When an individual purchases coverage for his or her own benefit, premiums are not deductible for federal income tax purposes (IRC § 213, 262 § 265).

          As a Sole Proprietor if you purchase a policy to replace your income, it would not matter whether how the premium was paid the premium is non-deductible, and benefits are received tax-free.

          A Partnership or S Corporation can deduct premiums for disability income coverage paid on behalf of a partner or 2% plus shareholder/employee. This is allowed under current IRS rules (Revenue Ruling 91-26), provided these payments qualify as “guaranteed payments”. Now this also gets a bit muddy because what if some in the group want to do this and others don't, it can become an administration problem and you typically have to allow all employees to participate.

          In a C-Corp it can pay the premiums for employee disability insurance but you need to be careful that discrimination does not happen because as an employee benefit from the corporation you would typically need to allow all employees to participate, not just the owner.

          My point is this is a very sticky topic which can work and there are pathways to get it done but you have to do your research and document it very well so that if there is an audit you are in a defendable position.

          Scott Nelson-Archer, CLU, ChFC
          303-953-0263 Direct / [email protected]

          Comment


          • #6
            Originally posted by Scott at MD Financial Services View Post

            I agree but there are several things that need to be taken into account as well. As an example, if it takes you $10k to run your life thus the need for disability is $10k if you have a tax free policy then you simply buy a $10k policy. If it is going to be a taxable benefit then one would need to buy $12,500 +/- to net out the taxes and thus have a $10k benefit to spend. By doing the tax deducted premium you do get the tax deduction but you are now buying 25%+/- more benefit.

            When an individual purchases coverage for his or her own benefit, premiums are not deductible for federal income tax purposes (IRC § 213, 262 § 265).

            As a Sole Proprietor if you purchase a policy to replace your income, it would not matter whether how the premium was paid the premium is non-deductible, and benefits are received tax-free.

            A Partnership or S Corporation can deduct premiums for disability income coverage paid on behalf of a partner or 2% plus shareholder/employee. This is allowed under current IRS rules (Revenue Ruling 91-26), provided these payments qualify as “guaranteed payments”. Now this also gets a bit muddy because what if some in the group want to do this and others don't, it can become an administration problem and you typically have to allow all employees to participate.

            In a C-Corp it can pay the premiums for employee disability insurance but you need to be careful that discrimination does not happen because as an employee benefit from the corporation you would typically need to allow all employees to participate, not just the owner.

            My point is this is a very sticky topic which can work and there are pathways to get it done but you have to do your research and document it very well so that if there is an audit you are in a defendable position.
            Yes I said “if you are one of the few…” for a reason, per the below explanation:

            Regarding the deductibility of DI premiums paid on behalf of the 2%+ s/h, the premiums for the shareholders are added to their wages but are not deductible by the shareholder, so the result is a wash. Iow, there is no “deduction” for DI premiums pd on behalf of a 2%+ s-corp shareholder. Any disability benefits pd in the future are non-taxable. (I think it’s important to notes that these premiums are not considered “guaranteed payments” as that term is used for partners only.)

            Same for 2%+ partners of a partnership: the premiums that are deductible by the partnership are considered guaranteed payments to the partner receiving them, which are fully taxable to the partner. As a result, the result is also a wash and any disability payouts to the 2%+ partner are also non-taxable.

            Of course, by “wash” above, I mean the premiums offset the income taxed to the s/h or partner. Because premiums will not be incurred according to the same proportion as ownership of the entities, the deduction and related income will not be allocated to shareholders in the same proportion as ownership.

            The only instance in which disability premiums are treated as true nontaxable employee benefits is for shareholder-employees of C corporations, which is what I meant by “one of the few”. It is extremely rare today for us to find a doctor client who is a C-corp shareholder.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment

            Working...
            X