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Employer reimbursement after policy year for disability premiums


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My firm has some clients who are getting advice for a local attorney about paying for their disability insurance policies. The advice doesn't pass the smell test with me but I can't find any cites to indicate it doesn't work. The advice is as follows:

A shareholder employee pays the premium on his individual disability insurance policy his self, out of personal funds. After the end of the policy year, if the shareholder did not suffer a disability, the corporation reimburses the shareholder for the premium. If the shareholder did suffer a disability the premium is not reimbursed.

If the shareholder did suffer a disability the disability benefits paid by the policy are treated as non-taxable benefits because the shareholder paid the current premium with personal funds. If no disability is suffered the reimbursement of the premium by the corporation is treated as a deductible expense of the corporation under Code Sec. 162 and is not included in the shareholders income under Code Sec. 106.

Does anyone have an opinion as to whether or not this works. It seems that the shareholder employee gets the best of both worlds. He can deduct the premiums in year when no disability in incurred, and then can treat the policy as paid for with after tax dollars when a disability is incurred, thereby causing the benefits to be non-taxable.

Thanks for your opinions.

Dean

Dean Huber

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Where does the shareholder employee get to deduct insurance premiums?

Where does an individual get to deduct personal insurance premiums?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest b2kates

Have seen this strategy proposed over the years.

Fundemental issue is the insurance individual or group. If individual, then would likely be compensation to shareholder and not "tax"free and includable as income to the shareholder..

Happy to discuss with you off line

Brett.

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Rev.rul 61-146 permits an employer to make a tax free reimbursment to an employee who purchases individual health ins. Dont know if it can be extended to disability ins. which is also excluded from taxable income under 105/106. This would not work for S corp. owner.

mjb

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