25% concentration test and Premium deductions

[Guest bosco]

I am confused. I've had brokers and TPA's tell me two different versions of what you use for premium deduction totals when performing the 25% keyman concentration test. I was taught you use only the pre-tax deduction that the employee is responsible for (i.e. for his/her own portion, spouse, dependents, etc.). A broker said no, that you use all of the premiums whether paid for by the employer or the employee. Any guidance would be greatly appreciated.

Thanks.

[g8r]

Unfortunately, there is no clear guidance.

The relevant provision in the code is (emphasis added):

(2) Key employees

In the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan for which the statutory nontaxable benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, statutory nontaxable benefits shall be determined without regard to the last sentence of subsection (f).

Harry Becker (of the IRS) has stated over the years that you use the full premium b/c it appears the benefit is based on the benefit attributable to a plan, i.e., the benefit is the coverage which is obtained only by paying the full premium.

I know some will say the benefit is the exclusion from income. While that makes sense, one could also argue that if you think that is the "benefit" then the amount someone defers isn't the correct amount. Shouldn't it be the actual tax savings to that individual? Of course no one would apply the test on that basis so the idea of using the full premium does make some sense. I'm not saying it's correct, but hopefully the explanation will explain why you hear different interpretations.