Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you.

“Phantom income”

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.”

What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases.

Check your W-2

What should you do if you think the tax cost of employer-provided group term life insurance is undesirably high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group-term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return

Consider some options

If you decide that the tax cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are several different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage, or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

Contact us if you have questions about group term coverage or how much it is adding to your tax bill.

© 2020 Covenant CPA

A Small Business Administration (SBA) loan can make big things happen for your small company. But the agency’s loan program is sometimes abused by con artists who know that many small business owners have little experience applying for financing and are, therefore, vulnerable to scams. Here’s what you should know.

Background on SBA products

The SBA provides various financing options with favorable terms and greater flexibility to small businesses and start-ups. It doesn’t disburse loans directly but gives lenders federal guarantees and backing to reduce lending risk. Individual businesses must themselves make arrangements with financial institutions that make loans.

Three key SBA programs are:

1. SBA 7(a) loans. This is the flagship product. It typically frees up working capital needed to acquire equipment, real estate or inventory.

2. Microloans. This program is more targeted. Smaller amounts are disbursed quickly to address short-term needs.

3. SBA 504 loans. This program is commonly used for commercial real estate purposes, such as the cost of buildings, land, equipment and renovations.

Look for red flags

If you’re applying for one of these types of loans, how can you avoid becoming a fraud victim? The government warns small business owners to be wary of companies offering to help them secure money from an SBA program. In particular, watch out for services that charge exorbitant fees or that guarantee you’ll get a loan if you work with them. In general, legitimate services don’t charge upfront fees to broker loans, perform credit checks or “process” applications. So if you’re asked to pay, walk away.

Fraud perpetrators also might claim that your business will be issued a forfeiture letter making it ineligible for any SBA funding if you don’t use their services. High-pressure sales tactics, such as threats or limited-time offers, are reliable indicators that you’re dealing with a fraudster. One way to verify suspicious claims is to call the SBA yourself.

Other bad actors may not ask for money at all. They’re simply after personal information that will enable them to steal your identity or access financial accounts. Don’t provide your Social Security number, bank account information or credit card information to any unsolicited caller or emailer.

Choose assistance carefully

Of course, many reputable businesses help companies apply for SBA loans — and they can make the process easier. But be sure to investigate the reputation of any business that contacts you. Better yet, ask trusted advisors or other small business owners for referrals.

© 2020 Covenant CPA

As the year winds to a close, most businesses see employees taking a lot of vacation time. After all, it’s the holiday season, and workers want to enjoy it. Some businesses, however, find themselves particularly short-staffed in December because they don’t allow unused paid time off (PTO) to be rolled over to the new year, or they allow only very limited rollovers.

There are good business reasons to limit PTO rollovers. Fortunately, there’s a way to reduce the year-end PTO vortex without having to allow unlimited rollovers: a PTO contribution arrangement.

Retirement saving with a twist

A PTO contribution arrangement allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.

This can be appealing to any employees who end up with a lot of PTO left at the end of the year and don’t want to lose it. But it can be especially valued by employees who are concerned about their level of retirement saving or who simply value money more than time off of work.

Good for the business

Of course the biggest benefit to your business may simply be that it’s easier to ensure you have sufficient staffing at the end of the year. But you could reap that same benefit by allowing PTO rollovers (or, if you allow some rollover, increasing the rollover limit).

A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.

Also, a PTO contribution arrangement might help you improve recruiting and retention, because of its appeal to employees who want to save more for retirement or don’t care about having a lot of PTO.

Set-up is simple

To offer a PTO contribution arrangement, simply amend your retirement plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.

Have questions about PTO contribution arrangements? Contact us at 205-345-9898. We can help you assess whether such an arrangement would make sense for your business.

© 2018 Covenant CPA