FBT on Group Life insurance, disablement & trauma insurance
Inland Revenue is currently reviewing employers who take out group life insurance, disablement and trauma insurance policies to cover employees. Inland Revenue is concerned that some employers have not been correctly accounting for Fringe Benefit Tax (FBT) on these policies.
Where an employer has taken out an insurance policy in its own name, but it’s the employees who receive the benefit of any claim, FBT will apply to that policy. FBT will also apply where the employer is the beneficiary of the policy, but the employer is holding the policy for the benefit of the employees or their estates (that is the employer has agreed to pay any receipt under the policy to the employee).
However, FBT does not apply where the employee has taken out the policy and the employer is meeting the cost of it by paying the premiums. These payments could be made either directly to the insurance company or by reimbursing the employee for some or all of the cost. Where the employee has taken out the policy and the employer is meeting the cost of it, premiums paid are treated as employee income and subject to PAYE.
Where FBT applies to an insurance policy, the FBT amount is calculated based on the premium that the employer pays to the insurer. Any amount paid out by the insurer under the policy are not subject to FBT, although other tax liabilities may arise.
The provision of trauma and disability insurance, and certain life insurance, is specifically included as a fringe benefit under the IRD’s rules. The premiums on these policies are known as ‘specified insurance premiums’. Policies that do not have specified insurance premiums e.g. many group insurance policies, will give rise to what is called an ‘unclassified benefit’. Whether a particular policy gives rise to a specified insurance premium or an unclassified benefit is important, when it comes to determining FBT liability. Specified insurance premiums may need to be allocated to a particular employee and FBT calculated based on that employee’s total remuneration (cash payments and benefits).
However, unclassified fringe benefits do not need to be attributed to an employee and are subject to ‘de minimis’ provisions. Under these provisions, no FBT is payable on unclassified benefits which fall below certain thresholds. Therefore, correctly identifying the nature of the fringe benefit that arises from an employer provided insurance policy is important.
If you have any questions regarding insurance cover provided to employees, please contact your local Findex tax adviser.