Employee Benefits eBook

LifeFocus.com T. Young info@lifefocus.com www.LifeFocus.com

Employee Benefits

March 28, 2010

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Table of Contents Employee Benefits ............................................................................................................................................ 9 What is it? ................................................................................................................................................ 9 Welfare benefit funds ............................................................................................................................... 9 Cafeteria plans ......................................................................................................................................... 9 Flexible spending accounts ......................................................................................................................10 Health reimbursement arrangements .......................................................................................................10 Health savings accounts .......................................................................................................................... 10 Types of employee benefits ..................................................................................................................... 10 General valuation rule and special valuation rules ...................................................................................11 Section 132 benefits ................................................................................................................................ 11 Cafeteria Plan as an Employee Benefit ............................................................................................................ 14 What is it? ................................................................................................................................................ 14 Methods of funding cafeteria plans .......................................................................................................... 14 Flexible Spending Account as an Employee Benefit .........................................................................................16 What is a flexible spending account (FSA)? ............................................................................................ 16 How does an FSA work? ..........................................................................................................................16 Health-care flexible spending accounts ................................................................................................... 17 Dependent-care flexible spending accounts ............................................................................................ 17 Health Reimbursement Arrangements ..............................................................................................................18 What is a health reimbursement arrangement (HRA)? ............................................................................ 18 Why do employers establish HRAs? ........................................................................................................18 What are the advantages of HRAs? .........................................................................................................18 What are the disadvantages of HRAs? .................................................................................................... 18 How are HRAs different from flexible spending accounts? ...................................................................... 19 How are HRAs different from Archer medical savings accounts (Archer MSAs)? ................................... 19 How are HRAs different from health savings accounts? ..........................................................................19 Tax considerations ................................................................................................................................... 20

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Health Savings Accounts .................................................................................................................................. 21 What is a health savings account (HSA)? ................................................................................................21 Who can establish an HSA? .................................................................................................................... 21 How do you establish an HSA? ................................................................................................................21 Who can make contributions to an HSA? ................................................................................................ 21 How much can you contribute to an HSA? .............................................................................................. 22 Can you make contributions to an HSA if you are covered under an FSA or HRA? ................................22 Can your contributions earn interest? ...................................................................................................... 23 How are contributions taxed? ...................................................................................................................23 How are distributions taxed? ....................................................................................................................23 What happens to funds remaining in your HSA? ..................................................................................... 24 Adoption Assistance from Employer ................................................................................................................. 25 What is it? ................................................................................................................................................ 25 Dependent Care Assistance: Employee Benefits ............................................................................................. 26 What is it? ................................................................................................................................................ 26 Types of dependent care assistance programs ....................................................................................... 26 Other types of dependent care assistance ...............................................................................................26 Dependent care tax credit ........................................................................................................................ 27 Education Assistance as an Employee Benefit .................................................................................................28 What is it? ................................................................................................................................................ 28 Educational assistance plans ...................................................................................................................28 Educational reimbursement program ....................................................................................................... 28 Tuition reduction program ........................................................................................................................ 29 Educational benefit trust ...........................................................................................................................29 Scholarships and fellowships ................................................................................................................... 29 Training programs .................................................................................................................................... 29 Deductibility of educational expenses ...................................................................................................... 29 Disability Insurance: Employee Benefits ........................................................................................................... 30 What is it? ................................................................................................................................................ 30

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Temporary disability ................................................................................................................................. 30 Long-term disability .................................................................................................................................. 31 Permanent disability .................................................................................................................................31 Welfare Benefit Funds as an Employee Benefit ................................................................................................32 What is it? ................................................................................................................................................ 32 Legal Services Plan as an Employee Benefit ................................................................................................... 33 What is it? ................................................................................................................................................ 33 Company Car as an Employee Benefit ............................................................................................................. 34 What is it? ................................................................................................................................................ 34 General valuation rule .............................................................................................................................. 34 Special valuation rules ............................................................................................................................. 34 Deductibility of car expenses ................................................................................................................... 35 Moving Expense Reimbursement as an Employee Benefit .............................................................................. 36 What is it? ................................................................................................................................................ 36 Life Insurance as an Employee Benefit .............................................................................................................38 What is it? ................................................................................................................................................ 38 Group term life insurance .........................................................................................................................39 IRS tax treatment of group term life insurance .........................................................................................40 Group whole life insurance .......................................................................................................................40 Group universal life insurance ..................................................................................................................42 Split dollar life insurance .......................................................................................................................... 43 Key employee life insurance .................................................................................................................... 43 Life Insurance Basics ........................................................................................................................................ 44 The many uses of life insurance .............................................................................................................. 44 How much life insurance do you need? ................................................................................................... 44 How much life insurance can you afford? ................................................................................................ 44 What's in a life insurance contract? ......................................................................................................... 44 Types of life insurance policies ................................................................................................................ 45 Your beneficiaries .................................................................................................................................... 45

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Where can you buy life insurance? .......................................................................................................... 46 Group Disability Insurance ................................................................................................................................ 47 The basics of group disability insurance .................................................................................................. 47 Eligibility rules .......................................................................................................................................... 47 Advantages of group disability coverage ................................................................................................. 48 Disadvantages of group disability coverage .............................................................................................48 Employer-sponsored group disability insurance ...................................................................................... 48 Group Health Insurance .................................................................................................................................... 50 When you apply, timing is everything .......................................................................................................50 The benefits of group coverage ............................................................................................................... 50 The drawbacks of group coverage ...........................................................................................................50 What you should look for in a group policy .............................................................................................. 50 Making the Most of Your Group Health Benefits ...............................................................................................52 Understand what you have ...................................................................................................................... 52 Ask before you need it ............................................................................................................................. 52 Be proactive ............................................................................................................................................. 53 What happens when you lose coverage? ................................................................................................ 53 As your lifestyle changes, so do your insurance needs ........................................................................... 53 Planning for retirement .............................................................................................................................54 What can you do if a claim is denied? ......................................................................................................54 What if you are unhappy with your health care? ...................................................................................... 54 Stay informed ........................................................................................................................................... 54 Health Insurance and COBRA: Sometimes You Can Take It with You ............................................................ 56 The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) may help you continue your health insurance coverage for a time ....................................................................................................... 56 The Health Insurance Portability and Accountability Act of 1996 expanded COBRA .............................. 57 The American Recovery and Reinvestment Act of 2009 provides Cobra subsidy ...................................57 Vision Care Insurance .......................................................................................................................................58 What is vision care insurance? ................................................................................................................ 58 How much does it cost? ........................................................................................................................... 58

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How does it work? ....................................................................................................................................58 Where do you get it? ................................................................................................................................ 58 Who should have it? .................................................................................................................................59 Dental Insurance ............................................................................................................................................... 60 What is dental insurance? ........................................................................................................................60 What does it cost? ....................................................................................................................................60 How does it work? ....................................................................................................................................60 Where do you get it? ................................................................................................................................ 60 Who should have dental insurance and who shouldn't? .......................................................................... 61 Mental Health Benefits ...................................................................................................................................... 62 What are mental health expenses? ..........................................................................................................62 Read your health insurance policy to determine whether mental health benefits are provided ............... 62 Pay close attention to the types of mental health care providers and the approval process ................... 62 Group health insurance plans and mental health .....................................................................................62 What to do if you need help ..................................................................................................................... 63 Tax Planning Tips: Life Insurance ....................................................................................................................64 Life insurance contracts must meet IRS requirements ........................................................................... 64 Keep in mind that you can't deduct your premiums on your federal income tax return .......................... 64 Employer-paid life insurance may have a tax cost ..................................................................................64 You should determine whether your premiums were paid with pre- or after-tax dollars ......................... 64 Your life insurance beneficiary probably won't have to pay income tax on death benefit received ........ 64 In some cases, insurance proceeds may be included in your taxable estate ......................................... 65 If your policy has a cash value component, that part will accumulate tax deferred ................................ 65 You usually aren't taxed on dividends paid .............................................................................................65 Watch out for cash withdrawals in excess of basis--they're taxable ....................................................... 65 You probably won't have to pay taxes on loans taken against your policy ............................................. 66 You can't deduct interest you've paid on policy loans .............................................................................66 The surrender of your policy may result in taxable gain ..........................................................................66 You may be able to exchange one policy for another without triggering tax liability ............................... 66

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When in doubt, consult a professional .................................................................................................... 66 Tax Planning Tips: Disability Insurance ............................................................................................................ 67 Individual disability income insurance ...................................................................................................... 67 Employer-sponsored group disability insurance ...................................................................................... 67 Benefits under a cafeteria plan ................................................................................................................ 67 Group association disability insurance .....................................................................................................68 Government disability insurance .............................................................................................................. 68 Is it wiser to buy disability coverage with pretax or after-tax dollars? ...................................................... 68 Tax Tips: Health Insurance ............................................................................................................................... 69 You don't include employer-paid premiums in your income .....................................................................69 What if your employer reimburses you for your premiums? .....................................................................69 In most cases, you won't be able to deduct the premiums you pay .........................................................69 If you're self-employed, special deduction rules may apply ..................................................................... 69 Your health insurance benefits typically aren't taxable ............................................................................ 70 What are the pros and cons of buying life insurance through my employer? ................................................... 71 Does a typical dental insurance policy cover braces? ...................................................................................... 72 If my employer goes out of business and discontinues its health plan, am I still eligible for COBRA benefits? 73 Is prescription drug coverage part of my medical coverage? ............................................................................74 I broke my leg and can't work. Am I entitled to file a disability claim with my employer? ..................................75 Can I see a specialist outside of my HMO provider network? ...........................................................................76 What recourse do I have if my insurer will cover only a generic version of a prescribed drug? ........................77 I'll be changing jobs, and I'm pregnant. Will I qualify for health insurance with my new employer? ................. 78 Can I buy short-term disability coverage through my employer? ...................................................................... 79 I'm looking for a job. How can I tell if an employer is offering a good insurance benefit package? .................. 80 Does my health insurance cover prescriptions filled by an on-line pharmacy? .................................................81 If I leave my company, can I take my life insurance policy with me? ................................................................ 82 What's the difference between an HMO and a PPO? .......................................................................................83 If I leave my job, will I lose my employer-sponsored health insurance? ........................................................... 84 If I have long-term disability insurance coverage through my employer, do I need my own policy, too? ..........85

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Why do I need life insurance? ...........................................................................................................................86 Should my spouse and I integrate our health insurance benefits? ................................................................... 87

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Employee Benefits What is it?

Today, a competitive employee benefit package can play an important role in an individual's employment decision making. An attractive employee benefit package will not only assist you in obtaining services that you might not otherwise be able to afford, but it might also be able to provide you with significant tax benefits.

Caution: This is a highly complex subject and this discussion is intended to provide you with only a general understanding.

Welfare benefit funds A welfare benefit fund is a method of funding a welfare benefit plan. A welfare benefit plan provides benefits for sickness, accident, disability, death, unemployment, vacation, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services, or holiday and severance pay plans. A welfare benefit fund allows your employer to prefund your welfare benefit plan by making deposits into the fund and using those deposits to purchase the welfare benefits at a later date.

There are two types of welfare benefit funds: the welfare benefit trust, also known as a taxable trust, and the voluntary employees' beneficiary association (VEBA), also known as a nontaxable trust. Regardless of the tax status of the employer's welfare benefit fund (i.e., whether a taxable trust or nontaxable trust), you as an employee will be subject to tax with respect to any welfare benefits when the benefit is actually paid or permitted by the trust, or you may exclude the welfare benefit you receive from the trust from your income for tax purposes if and to the extent there is a statutory exclusion for an employer-paid benefit (e.g., the exclusion for health insurance paid for by the employer).

Cafeteria plans In general A cafeteria plan allows you to choose from an array of benefits and customize a benefits package based on your individual needs. You can purchase benefits from the plan by using either a flexible spending account or a dollar amount that your employer previously allocates to you. Cafeteria plan benefits are not included in your gross income as wages.

Taxable (cash) versus nontaxable (qualified) benefits A cafeteria plan allows you to choose from among both taxable (cash) and nontaxable (qualified) benefits.

Taxable benefits include not only cash, but also any benefits that you purchase with after-tax dollars or the benefit value that your employer would normally treat as taxable compensation. Taxable benefits can include cash, car or homeowners insurance, and group legal services. Nontaxable benefits are not included in your gross income. Nontaxable benefits can include health insurance, group term life insurance, and dependent care assistance.

Methods of funding cafeteria plans There are numerous ways for your employer to fund your cafeteria plan. A flexible spending account allows you to contribute pretax dollars to an account that your employer can later use to reimburse you for qualified expenses. A premium-only cafeteria plan allows your employer to pay for a certain amount of your health coverage while you pay the remaining difference with pretax dollars through a salary reduction program. An add-on cafeteria plan provides you with basic low-level benefits and allows you to supplement or add on to those benefits. Under an opt-up/opt-down cafeteria plan, your employer provides both high- and low-level benefits and allows you to either decrease or increase your level of benefits. A core plus option plan allows you to supplement

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your benefits beyond the core benefits that your employer provides to you under the plan. Under a modular cafeteria plan, your employer combines certain benefits into packages and allows you to choose the benefit package that suits your particular needs. Under a full-flex cafeteria plan, your employer places a price on benefits and then gives you a certain number of credits with which to purchase the benefits.

Flexible spending accounts A flexible spending account (FSA) allows you to contribute pretax dollars to an account that your employer can later use to reimburse you for qualified expenses. Since contributions are made before taxes, you save Social Security taxes, federal income tax, and, in most cases, state and local income taxes on the money you put into the account. The pretax dollars that you use to fund the account usually come from a salary reduction program.

Health reimbursement arrangements A health reimbursement arrangement (HRA) is an arrangement that allows you to pay for medical costs using a pool of employer-provided funds. An employer establishes an HRA and contributes funds to it. You cannot make contributions. The HRA reimburses you for qualified medical expenses you've incurred, up to a maximum amount per coverage period. Reimbursements you receive are not taxable income. Unlike flexible spending accounts, HRAs allow employees to carry over unused funds from year to year.

Health savings accounts If you are covered by a qualified high-deductible health plan at work, your employer may offer you the opportunity to participate in a health savings account (HSA). An HSA is a tax-advantaged savings account with funds earmarked for medical expenses. Amounts contributed to the HSA belong to you and are completely portable, remaining with you if you switch jobs, become unemployed, or retire. Amounts left in your account at your death may be bequeathed to a spouse or other beneficiary. Funds not spent stays in the account from year to year, earning interest tax free, and may be invested in stocks or mutual funds. Withdrawals are tax free if used for qualified medical expenses. If you use the money for non-health expenditures, you pay tax on it plus a 10% penalty. After age 65, a withdrawal used for a non-health purpose will be taxed, but not penalized.

Contributions you make may be either pretax if offered through a cafeteria plan or tax deductible (even if you do not itemize).

Types of employee benefits In general Employee benefits can come in the form of either cash or noncash benefits, also known as fringe benefits. Both types of benefits can help you to meet needs that otherwise could not be met. In addition, certain benefits are excludable from your gross income.

Cash compensation Although cash compensation is not traditionally thought of as an employee benefit, it plays a major role in your overall benefit package. Some employee benefits are valued as to their cash equivalency, and others have contribution schedules that are based upon your rate of pay.

Noncash/fringe benefits Noncash benefits, also known as fringe benefits, can include the use of a company car, parking, moving expense reimbursement, life, health, and disability insurance, dependent care assistance, adoption assistance, and tuition reimbursement. Unless the fringe benefit that your employer provides to you falls within certain exceptions, your employer must include the value of the fringe benefit in your gross income as wages.

Your employer can determine the value of the fringe benefit by using either the general valuation rule or one of the special valuation rules.

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General valuation rule and special valuation rules General valuation rule Under the general valuation rule, your employer must include, in your wages, any amount over the fair market value of a fringe benefit when it is more than: • Any amount you paid for the benefit, or • Any amount the law excludes from income The fair market value of a fringe benefit is the amount you would have to pay a third party to obtain the fringe benefit.

Tip: When your employer provides you with a company car, the fair market value of the car is the amount you would have to pay a third party to lease the same or a similar car in the same or similar circumstances.

Special valuation rules Special valuation rules include the annual lease value rule, the vehicle cents-per-mile rule, the commuting rule, and the employer-operated eating facility rule. Your employer can only use the special valuation rules if certain prerequisites are met.

Annual lease value rule If your employer provides you with a company car for an entire year, he or she can use the car's annual lease value in order to determine its value. If your employer provides you with a car for less than one year, the value of the car is either that of a prorated annual lease or a daily lease value.

If you use the car for business, you may be able to exclude part of the car's value as a working condition fringe benefit.

Vehicle cents-per-mile rule Another way for your employer to determine the value of a company car is to use the vehicle cents-per-mile rule.

Under the vehicle cents-per-mile rule, your employer values the car by using a standard mileage rate and multiplying it by the total miles that you drive for personal reasons. Your employer can use the vehicle cents-per-mile rule if your employer provides you with a vehicle that he or she would reasonably expect you to use in your employer's business or if the vehicle meets certain mileage requirements.

Commuting rule The commuting rule values the use of a company car at $1.50 per one-way commute for each employee who commutes in the car.

Employer-operated eating facility rule Under the employer-operated eating facility rule, an employer must include a portion of the total meal value in your gross income. The total meal value is calculated as 150 percent of the direct operating costs of the eating facility, which is considered to be the value of all meals the facility provides to employees during the year.

Section 132 benefits

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In general While your employer must include the value of most fringe benefits in your gross income, there are certain noncash/fringe benefits that the IRS specifically allows your employer to exclude from your wages. These fringe benefits are found in Section 132 of the Internal Revenue Code and include: • No additional cost service • Qualified employee discount • Working condition fringe • De minimis (minimal) fringe • Qualified transportation fringe • Qualified moving expense reimbursement • Certain athletic facilities No additional cost service No additional cost service is service your employer provides you at no substantial additional cost to him or her.

No additional cost services are usually found in excess capacity services, such as airlines, trains, buses, and cruises.

For example, an airline allows its employees to fly free on those planes that have empty seats. The airline is providing a no additional cost fringe benefit to its employees. By allowing its employees to fly free of charge on planes with empty seats, the airline provides its employees with a service that they sell to the general public, at no additional cost to the airline.

The no additional cost service that your employer provides is not includable in your gross income if your employer does not incur any substantial costs in providing that service to you.

Qualified employee discount A qualified employee discount is a price reduction that your employer gives you on the same property or services that your employer offers to his or her customers.

Tip: The no additional cost service and qualified employee discount benefits that your employer provides to you must be for property or services that he or she offers for sale to customers in the ordinary course of business in which you perform substantial services.

Working condition fringe Working condition fringe benefits include any property or service that your employer provides whereby if you paid for the property or service, you could deduct it as a business expense.

De minimis (minimal) fringe A de minimis fringe benefit includes any property or service that your employer provides that has so small a value that it would be unreasonable or administratively impracticable to account for it. De minimis fringe benefits include the use of a secretary to type a personal letter, occasional personal use of a copying machine, and occasional tickets to entertainment events.

Example(s): Acme Corp. allows its employees to use the photocopy machine for personal use.

Acme estimates that the photocopy machines are used for company business 95 percent of the time and that employees use the photocopy machines for personal use 5 percent of the time. Since

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the employees' personal use of the photocopy machine is minimal, it would qualify as a de minimis fringe benefit.

Qualified transportation benefits Qualified transportation benefits are benefits that your employer provides you with in the form of transportation in a commuter vehicle, bicycle expenses, a transit pass, or qualified parking. Qualified transportation benefits are, within certain limits, excludable from your gross income. The value of a qualified transportation benefit is based on the benefit's fair market value.

Qualified moving expense reimbursement Qualified moving expense reimbursements are amounts that your employer gives to you, directly or indirectly, as payment for or reimbursement of expenses that would be deductible as moving expenses if you paid for or incurred them yourself. Deductible moving expenses include the moving of household goods and personal effects from the former home to the new home, and traveling from the former home to the new home if such move is in connection with the start of work at a new principal place of employment.

Tip: There is no dollar limit on the exclusion for qualified moving expense reimbursements.

However, the expenses must be reasonable and substantiated.

Athletic facilities Athletic facilities include any on-premises gym or other facility that your employer provides to employees. The exclusion does not apply if your employer makes access to the athletic facility available to the general public.

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Cafeteria Plan as an Employee Benefit What is it?

In today's diversified workplace, no two employees are alike. Each of them has different needs. One way that your employer can provide you with a wide variety of benefits is through a cafeteria plan, also known as a flexible benefit plan. A cafeteria plan allows you to choose from an array of benefits and customize a benefits package that is based on your individual needs. You can purchase benefits from the plan by using either a flexible spending account or a dollar amount that your employer previously allocates to you. Cafeteria plan benefits are not included in your gross income as wages.

Tip: It is important that your employer comply with the provisions of Section 125 of the Internal Revenue Code. Section 125 provides an exception for cafeteria plans from the "constructive receipt" doctrine. Under that doctrine, you are taxed on money or property that you have a free election to receive, even if you choose not to receive it. If the conditions of Section 125 are not met in your employer's cafeteria plan, you are taxed on the value of any taxable benefits that are available from the plan, even if you choose a nontaxable benefit.

Taxable (cash) versus nontaxable (qualified) benefits A cafeteria plan allows you to choose from among both taxable (cash) and nontaxable (qualified) benefits. As a result, a cafeteria plan allows you to save money by paying for benefits on a pretax basis rather than with after-tax money. Taxable benefits include not only cash, but also any benefits that you purchase with after-tax dollars or the value of which your employer would normally treat as taxable compensation. Taxable benefits can include: cash, car and homeowners insurance, and group legal services. Nontaxable benefits are not included in your gross income. Nontaxable benefits can include health insurance, group term life insurance, and dependent care assistance.

Example(s): Big Corp. offers its employees $2,000 worth of cafeteria plan benefits. Richard, who is unmarried and has no children, elects to receive the $2,000 in cash. Since the cash is a taxable benefit, Richard must pay taxes on the $2,000. Mary, who is married and has two children, elects to spend the $2,000 on dependent care and health insurance for her children. Since dependent care and health insurance are nontaxable benefits, Mary does not have to pay taxes on the $2,000 worth of benefits. Finally, Cindy, who is married and has one child, elects to receive $1,000 in cash and spend $1,000 on dependent care assistance. Cindy will have to pay taxes on the $1,000 in cash, but she does not have to pay taxes on the $1,000 for dependent care assistance.

Tip: Typically, your annual election from a cafeteria plan is irrevocable. However, the IRS allows you to revoke your election in certain situations. For more information on the IRS allowance of revocation of an election, see IRS Final Regulation, Section 1.125.

Methods of funding cafeteria plans Flexible spending account A flexible spending account allows you to contribute pretax dollars to an account that may later be used to reimburse you for benefits you purchase through the cafeteria plan. The pretax dollars that you use to fund the account usually come from a salary reduction program.

Premium-only A premium-only cafeteria plan limits your available benefits to the payment of insurance premiums. A premium-only plan allows your employer to pay for a certain amount of your health coverage while you pay the remaining difference with pretax dollars through a salary-reduction program.

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Add-on An add-on cafeteria plan provides you with basic low-level benefits and allows you to supplement or add on to those benefits. Employers usually use add-on plans when the benefits they provide are below the norm.

Opt-up/opt-down Under an opt-up/opt-down cafeteria plan, your employer provides you with both high- and low-level benefits. If you decrease your benefits to a lower level, you receive credits that are payable to you as taxable income. If you increase your benefits to a higher level, you pay for the extra cost, usually through a salary reduction program.

Core plus options Under a core plus options cafeteria plan, your employer establishes a minimum level of core benefits that he or she provides to each employee. The plan then allows you to supplement your benefits beyond the core benefits that your employer provides to you under the plan. You can supplement the core options with such benefits as additional life insurance or dental and vision care benefits. You can usually supplement your core benefits by either purchasing benefits with credits or through a salary reduction program.

Modular Under a modular cafeteria plan, your employer combines certain benefits into packages and allows you to choose the benefit package that suits your particular needs.

Example(s): ABC Company allows its employees to choose from three types of benefit packages using the modular approach. The first package provides medical insurance with a $150 deductible, dental insurance, $125,000 in life insurance, and long-term disability insurance--all at a cost of $275 per month. The second package provides medical insurance with a $300 deductible, dental insurance, $75,000 in life insurance, and minimal long-term disability--at a cost of $150 per month.

Finally, ABC's third benefit package provides a basic medical plan with a $500 deductible, no dental plan, $15,000 in life insurance, and no long-term disability--at a cost of $75 per month.

Caution: Under a modular plan, you cannot pick and choose benefits from the various packages.

Full-flex Under a full-flex cafeteria plan, your employer places a price on all benefits that he or she makes available to you under the plan. You are then given a certain amount of credit with which to purchase benefits. Under a full-flex plan, you are usually given the option to opt out of benefits and take all or some of the credits in cash.

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Flexible Spending Account as an Employee Benefit What is a flexible spending account (FSA)?

A flexible spending account (FSA) allows employees to pay for certain qualifying expenses with pretax dollars.

With an FSA, you contribute pretax earnings to the plan, usually through salary reduction, and submit qualifying expenses to the plan for reimbursement. Qualifying expenses can include either medical expenses or dependent care expenses.

Tip: An FSA can be offered as a stand-alone plan, or as part of a more comprehensive cafeteria plan.

How does an FSA work?

Employees make an FSA election Employees elect to contribute a specified amount to the FSA plan each plan year. This election generally must be made before the start of each plan year, and is irrevocable. Employees must, therefore, estimate qualifying expenses for the coming plan year. Participation in an FSA is voluntary--you do not have to contribute to the FSA. Tip: While employee contribution elections are irrevocable, a plan may allow you to change contribution amounts in specific situations. For example, a plan may allow you to change a contribution election during the plan year if you get married or divorced, or have a child.

Employees submit qualifying expenses for reimbursement The FSA reimburses employees for qualifying expenses that are properly submitted. Only expenses that are incurred during the plan's period of coverage will be reimbursed. The period of coverage generally means the plan year (while this is often a calendar year, it does not have to be). However, the terms of a plan may allow the period of coverage to extend up to 2½ months after the end of the plan year.

Tip: FSA plans that allow an extra 2½ months effectively have a 14 month and 15 day coverage period.

Tip: Plans may also allow an additional period of time to submit expenses for reimbursement after the close of the coverage period. So an FSA that operates on a calendar year might provide for reimbursement of expenses incurred through March 15 (2½ months after the end of the plan year), but might allow you to submit those expenses through April 15.

Unused funds are forfeited ("use it or lose it") Employee funds remaining in an FSA, after all qualifying expenses for the coverage period have been paid, are forfeited. This is commonly known as the "use it or lose it" rule. Employers are generally able to use forfeited funds to pay administrative costs of the plan.

Tip: Why do you forfeit unused funds? Internal Revenue Code (IRC) Section 125, which governs flexible spending accounts, prohibits the deferral of compensation. Were an FSA to allow your unused funds to "roll over" to the next period of coverage, you would effectively be deferring compensation.

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Health-care flexible spending accounts A health-care flexible spending account reimburses employees for qualifying medical and dental expenses.

Expenses that can be reimbursed by a health-care FSA include the annual deductibles for a health-care plan, as well as any medical and dental expenses that your health plan does not cover. A health-care FSA can also reimburse employees for over-the-counter medications.

With a health-care FSA, you can receive reimbursement for expenses before sufficient funds are withheld from your pay, as long as your total expenses submitted don't exceed the contribution amount you elected for the plan year.

Example(s): John, an employee at Company X, elects to contribute $1,200 to the Company X health-care FSA. As a result, $100 is deducted from John's pay each month and contributed to the FSA plan. One month into the plan year, John pays $1,200 in qualifying medical expenses, and submits the expenses for reimbursement. Even though John has paid only $100 to the FSA at the time he submits the expenses for reimbursement, the FSA will reimburse John for the full $1,200 in qualifying expenses.

Tip: There is no legal limit on the amount that an employee can contribute to a health-care FSA. However, to limit potential loss, most employers impose a cap.

Dependent-care flexible spending accounts A dependent-care FSA reimburses employees for qualifying expenses relating to the care of eligible individuals.

Qualifying expenses are non-medical expenses that allow the employee, or the employee's spouse, to work or attend school full time. These expenses include day care, nursery school, day camp, babysitters, before/after school programs, and caregiver expenses for disabled individuals who live with the employee.

Tip: Eligible individuals include qualifying dependents who are children under the age of 13, a spouse who is physically or mentally incapable of caring for him or herself, or a disabled individual who requires full-time care because of a physical or mental incapacity.

Tip: An employee can contribute up to $5,000 each year to a dependent-care FSA (individuals who file their federal income tax returns as married filing separate can contribute up to $2,500 each year).

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Health Reimbursement Arrangements What is a health reimbursement arrangement (HRA)?

A health reimbursement arrangement (HRA) is an employer-sponsored health-care option that allows employees to pay for medical costs using a pool of employer-provided funds. HRAs reimburse employees for qualified medical expenses they've incurred, up to a maximum amount per coverage period.

Why do employers establish HRAs? HRAs are typically established to meet the needs of both employers and employees. Employers may establish HRAs to provide better health-care coverage for employees or to contain health-care costs. In some cases, HRAs serve as primary health insurance programs. Most commonly, employers offer HRAs in conjunction with high-deductible medical or accident insurance plans. Employees who pay deductibles or other costs not covered by the high-deductible plan are reimbursed for these costs from their employer's HRA. In both cases, the employer saves money on health insurance premiums.

What are the advantages of HRAs? To employers: • Employers can make compensation packages more attractive by offering HRAs. • Employers can contain health-care costs by offering HRAs in conjunction with high-deductible major medical plans.

To employees: • HRAs are funded solely by employers. An HRA cannot be funded by a salary-reduction election either directly or indirectly through a cafeteria plan.

• HRAs can be used to pay for health insurance premiums (e.g., major medical plans), as well as services typically not covered by health plans (e.g., eyeglasses or alternative medicines).

• HRA reimbursements are generally excludable from the employee's gross income, provided the reimbursements are for qualified medical expenses as defined by the tax code.

• HRAs can allow participants to carry over any unused amounts into the next year.

• HRAs may continue to reimburse former or retired employees for medical expenses.

What are the disadvantages of HRAs? To employers: • Employers offering HRAs must pay administrative costs to make sure they comply with complex legal and tax requirements.

• Employers must pay the full cost of funding the plan.

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To employees: • Employees will face increased paperwork, since they must submit receipts or other documentation in order to be reimbursed for qualified health-care expenses.

• Employees may shoulder more of the cost of health care with an HRA than they would with a traditional group health plan.

How are HRAs different from flexible spending accounts?

Although HRAs and flexible spending accounts (FSAs) share certain attributes, they are significantly different.

FSAs require employees to make pretax contributions to an account, while HRAs prohibit this; only employers can make contributions to an account. In fact, if it appears that an employee's salary has been reduced to offset the cost of the HRA, the status of the arrangement could be jeopardized. HRA funds can only be used to reimburse employees for qualified medical expenses, whereas FSAs can be used for benefits other than health care.

Another important difference is that FSAs renew annually with a "use-it-or-lose-it" clause. If an employee has a remaining balance, those funds are given to the employer to pay administrative costs associated with the plan.

HRAs, however, allow employees to carry over unused funds from year to year.

Example(s): If Ed Employee elects to contribute $2,000 to an FSA this year, and his reimbursable medical expenses for this year add up to only $1,600, Ed will lose the remaining $400 in the account.

Example(s): But an HRA works this way: In Year 1, Ed's employer sets the HRA maximum reimbursement amount at $1,000. If Ed incurs only $600 of qualified medical expenses, the $400 balance remains in Ed's account. In Year 2, if Ed's employer continues the reimbursement maximum at $1,000, Ed will have $1,400 in his HRA. Tip: An employer may offer both a health FSA and an HRA. But if coverage is provided under an HRA and a health FSA for the same health-care expenses, HRA funds must be exhausted before reimbursements can be made from the FSA, unless the HRA plan document specifies that coverage under the HRA is available only after expenses exceeding the dollar amount of the FSA have been paid.

How are HRAs different from Archer medical savings accounts (Archer MSAs)?

Archer MSAs, previously called medical savings accounts, operate like HRAs. However, Archer MSAs are only available to individuals who fall into one of two categories: • Employees (or their spouses) of companies that employ 50 or fewer people and maintain a high-deductible health plan • Self-employed individuals (or their spouses) who also have a high-deductible health insurance plan The Archer MSA program ended on December 31, 2007.

How are HRAs different from health savings accounts?

Health savings accounts (HSAs), created under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, allow employees to save tax-deductible money for routine medical care. Because they share many of the same features and benefits, HRAs and HSAs may be easily confused, but they differ in many respects. Here are some of the significant differences between them:

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• HSAs must be established in conjunction with high-deductible health plans; no such requirement applies to HRAs • HSAs may be established by individuals and employers; HRAs may only be established by employers • HSAs allow both individual and employer contributions; HRAs are funded solely by employer contributions • HSAs are owned by individuals and are portable; HRAs are owned by employers and are not portable • HSA funds can be invested and earn interest; HRA funds cannot Caution: The Tax Relief and Health Care Act of 2006 authorized limited rollovers from HRAs to HSAs. If eligible, you may make a one-time transfer of funds from your HRA to your HSA, as long as you do so before January 1, 2012. The maximum amount you can transfer is the lesser of your HRA balance as of the date of the transfer or your HRA balance as of September 21, 2006.

Caution: If you are currently covered under an HRA, you may be eligible to establish an HSA only in limited circumstances.

Tip: An individual can roll over funds in an existing Archer MSA to an HSA.

Tax considerations If an HRA is considered an employer-sponsored accident or health plan under IRS rules, reimbursements for health-care expenses (including health insurance premiums) are generally excludable from the employee's gross income. But to be considered excludable, the reimbursements must be for health-care expenses incurred by individuals covered by the HRA. These individuals may include: • Current employees • Former employees (including retired employees), whether or not they elect COBRA continuation coverage • Spouses and dependents of employees and former employees • Spouses and dependents of deceased employees Caution: HRAs may only reimburse qualified expenses that are substantiated and that occur after the date an employee first enrolled in the HRA. HRAs must comply with other complex IRS regulations. For more information, consult a tax advisor or the IRS website.

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Health Savings Accounts What is a health savings account (HSA)?

A health savings account (HSA) is a savings vehicle established to set aside funds tax free to pay for health care expenses. HSAs, created as part of the Medicare Prescription Drug and Modernization Act of 2003, expand upon the benefits offered by Archer medical savings accounts (Archer MSAs). Like Archer MSAs, HSAs allow individuals who have high-deductible health plans (HDHPs) to save money for health-care expenses tax free. But whereas Archer MSAs can be established only by employees of small businesses and self-employed individuals, HSAs can be established by any qualified individual covered by an HDHP. Caution: The Archer MSA program expired on December 31, 2007.

Who can establish an HSA? Generally, if you are covered under an HDHP, you are eligible to establish an HSA. In 2010, a qualifying HDHP health plan (1) has an annual deductible of at least $1,200 for individual coverage or $2,400 for family coverage ($1,150 for individual coverage or $2,300 for family coverage in 2009), and (2) limits annual out-of-pocket expenses (e.g., co-pays, deductibles) to $5,950 for individual coverage or $11,900 for family coverage ($5,800 for individual coverage or $11,600 for family coverage in 2009).

You will not be eligible to open an HSA, even if you are covered under an HDHP, if any of the following apply: • You are already covered under a non-HDHP, including a comprehensive major medical plan, a plan sponsored by your employer or your spouse's employer, or a prescription drug plan or rider with a low deductible or no deductible. (Some health plans are exempted from this provision, including dental or vision care insurance, long-term care insurance, disability insurance, and accident insurance.)

• You can be claimed as a dependent on another person's income tax return.

• You are entitled to Medicare coverage (i.e., you are age 65 or older), and have enrolled in Medicare.

Caution: To qualify as an HDHP, a plan offering family coverage must specify that no payment can be made from the plan for any individual (except for exempt preventative care benefits to which a deductible does not need to apply) until the family deductible is satisfied.

Caution: If your spouse has non-HDHP family coverage, but that plan does not cover you, you may still contribute to an HSA if you are otherwise eligible to do so. However, your spouse will not be eligible to contribute to an HSA. Tip: HDHP deductibles and out-of-pocket expense limits are indexed annually for inflation.

How do you establish an HSA? An HSA is a tax-exempt trust or custodial account that can be established through any qualified trustee or custodian, including a bank, an insurance company, or a third-party administrator. In some cases, this may be the same institution offering the HDHP. You can open an HSA on your own or, if available, through your employer.

Employers may offer HSAs as part of a cafeteria plan.

Who can make contributions to an HSA? You, your eligible family members, or others who wish to do so can make contributions to your HSA. If you're

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employed, your employer may also make contributions to your HSA. Contributions may be made directly or through salary reduction under a cafeteria plan (if offered by your employer). However, no contributions can be made to your HSA once you retire.

Caution: Employers who make contributions to employee HSAs must generally make comparable contributions to the HSAs of all comparable participating employees (either the same percentage of the deductible amount or the same dollar amount). Otherwise, the employer must pay an excise tax equal to 35 percent of the actual contributions made. An employer, can, however, make larger HSA contributions for nonhighly compensated employees than for highly compensated employees without violating the comparability rule. In addition, the comparability rule is applied separately to part-time employees and does not apply to contributions made through a cafeteria plan. However, contributions to an HSA made under a cafeteria plan are subject to Section 125 nondiscrimination rules.

How much can you contribute to an HSA? For 2010, you can contribute up to $3,050 for individual coverage or $6,150 for family coverage, to your HSA ($3,000 for individual coverage or $5,950 for family coverage for 2009). This annual limit is the sum of the limits determined separately for each month (i.e., the amount you can contribute in each month is computed by dividing the annual contribution limit by 12).

Example(s): For example, Jason is covered by an HDHP starting on January 1, 2010 and will remain covered for the rest of the year. Since his maximum annual contribution limit is $3,050, his monthly contribution limit is $254 ($3,050 divided by 12).

You can choose to make monthly contributions to your HSA, or you can make a lump-sum contribution any time before your tax return becomes due (i.e., for most individuals, by April 15th of the year following the year for which contributions are being made), as long as your contributions have already accrued.

What if you become eligible for an HSA after the beginning of the year? In this case, your maximum contribution for the year is the annual maximum dollar amount for the year, even though you weren't eligible for the entire year. However, you must remain in the HSA-eligible plan for the entire calendar year following the last month of the year in which you made that contribution. Otherwise, the contribution will be included in your gross income for the calendar year in which you ceased to be eligible, and will be subject to an additional 10 percent penalty tax.

You may also be eligible to make additional "catch-up contributions" to your HSA if you are 55 or older. The catch-up contribution amount is $1,000. If eligible, both you and your spouse can make separate catch-up contributions to an HSA. However, no regular or catch-up contributions can be made once you reach age 65 and are enrolled in Medicare.

Caution: Contributions you make to an Archer MSA or to another HSA will reduce the amount you can contribute to your HSA for the same year.

Can you make contributions to an HSA if you are covered under an FSA or HRA? You may be ineligible to make contributions to an HSA if you are currently covered under a flexible spending account (FSA) or a health reimbursement arrangement (HRA) that duplicates coverage provided by the HSA. However, if you have an FSA or an HRA, you will be eligible to participate in an HSA if: • Your FSA or HRA is a limited purpose account that repays or reimburses only vision, dental, or preventative care expenses • Your FSA or HRA is a high-deductible arrangement (called a post-deductible arrangement by the IRS) that pays or reimburses health-care expenses only after the minimum annual HDHP deductible has been satisfied

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• You suspend your HRA for a time by electing to forgo payment or reimbursement of HRA benefits incurred during the suspension period (your employer can continue to make contributions during the suspension) • Your HRA is a retirement HRA that only reimburses medical expenses you incur once you retire (though contributions can be made before you retire).

Can your contributions earn interest?

Yes. As the account owner, you can direct your contributions to a savings or investment option offered by the qualified trustee or custodian of your HSA. Any interest and investment earnings on contributions grow tax deferred until withdrawn, and like contributions, will be tax free when withdrawn if used to pay qualified medical expenses.

How are contributions taxed?

Individual contributions you make to your HSA that do not exceed the maximum contribution limit are tax deductible on your federal income tax return. Because you deduct these contributions "above-the-line" when computing your adjusted gross income, you can deduct HSA contributions even if you don't itemize. You can also deduct contributions made by a family member on your behalf.

If your employer makes contributions to your HSA, these are excludable from your gross income. Any contributions made through a cafeteria plan are treated as employer contributions. However, you cannot deduct employer contributions to your HSA. Tip: Employer contributions will be reported in Box 12 of your Form W-2.

Tip: Employer contributions are not taxable to the employer and are not subject to FICA or FUTA taxes.

How are distributions taxed?

You can withdraw money from your HSA for qualified medical expenses for yourself, your spouse, and your dependents. Distributions from an HSA for qualified medical expenses are not taxable. However, distributions for nonqualified expenses are considered taxable income and are subject to an additional 10 percent penalty.

Tip: The 10 percent penalty for nonqualified expenses does not apply if the distribution is made as a result of the beneficiary's death or disability or when the beneficiary reaches age 65.

What are qualified medical expenses?

Qualified medical expenses are health-care expenses, as defined by Internal Revenue Code 213(d), that are paid by you, your spouse, or your dependents. These include laboratory fees, prescription and nonprescription drugs, dental treatment, ambulance service, eyeglasses, and hearing aids, as well as many other health care expenses.

HSA funds may also be used to cover health insurance deductibles and co-payments.

Generally, health insurance premiums, including HDHP premiums, are not qualified expenses, except for the following types of health coverage (1) COBRA coverage; (2) Qualified long-term care insurance (3) Health coverage maintained while receiving unemployment compensation and (4) Retiree health insurance other than a Medicare supplemental policy (Medigap).

Tip: The HSA trustee or employer is not responsible for ensuring that amounts distributed from an HSA are used for qualified medical expenses.

For a list of qualified medical expenses, see IRS Publication 502.

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Are rollovers permitted?

Some rollovers are permitted. For example, you may roll over funds from an existing Archer MSA to an HSA, and you may roll over funds from one HSA to another. Rollovers are not subject to the limits that apply to contributions. Funds must be rolled over into your HSA within 60 days of receiving the distribution in order to be exempt from income tax and the additional 10 percent penalty that applies to nonqualified distributions.

The Tax Relief and Health Care Act of 2006 also authorized limited rollovers to HSAs from other types of accounts. If eligible, you can make a one-time transfer of funds to your HSA from an HRA or an FSA, as long as you do so before January 1, 2012. The maximum amount you can transfer is the lesser of the balance as of the date of transfer or the balance as of September 21, 2006.

If eligible, you may also roll over funds from your IRA (other than a SEP or SIMPLE IRA) to your HSA, generally once during your lifetime. However, the amount you roll over can't exceed the annual HSA contribution limit for that year, and is reduced by any amount you've already contributed to your HSA for the year.

What happens to funds remaining in your HSA? At the end of the year One of the advantages of HSAs is that unlike FSAs, HSAs do not have a "use it or lose it" provision. Funds remaining in your account at the end of the year are not forfeited and can continue to accumulate tax free year after year until withdrawn.

If you change jobs An HSA is portable. Because the account is yours, you can keep it and continue to make contributions even if you change employers or leave the workforce.

If you divorce If all or part of your interest is transferred to your spouse as part of a divorce settlement, it will not be considered a taxable transfer, and the transferred interest will continue to be treated as an HSA. If you retire Although you can no longer open or make contributions to an HSA once you reach age 65 and are enrolled in Medicare, you can take tax-free distributions from your account to pay for medical expenses. You can withdraw funds from your account for nonmedical purposes without owing a penalty (although the amount you withdraw will be subject to income tax).

If you die Funds remaining in your HSA upon your death become the property of your designated beneficiary. If the beneficiary is your spouse, he or she becomes the account holder and the account remains an HSA. If the beneficiary is not your spouse, the account ceases to be an HSA as of the day of your death, and the fair market value of the funds are includable in your beneficiary's gross income.

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Adoption Assistance from Employer What is it?

If you are interested in adopting a child, you may want to look into whether your employer offers adoption assistance through an adoption assistance program. In 2010, the law allows an employer to provide up to $12,170 (up from $12,150 in 2009) of adoption assistance tax free. The exclusion generally applies to certain qualifying adoption expenses paid or reimbursed by your employer (in the case of an adoption of a special needs child, however, the exclusion is not limited to the amount of qualified adoption expenses).

Tip: There is also an adoption tax credit of up to $12,170 per eligible child (in 2010). Adoption expenses for which your employer pays under an adoption assistance program may not be taken into account in determining the amount of the credit for adoption expenses. However, you can claim both the maximum adoption credit and the maximum tax-free assistance in connection with a single adoption.

Example(s): Dick and his wife, Martha, adopt a child in 2010. Dick's company pays $5,000 of qualified expenses for Dick and Martha's adoption. Dick and Martha pay another $7,500 of their own money toward the adoption. Say Dick and Martha's modified adjusted gross income (MAGI) will be $80,000 for the year. Dick and Martha will owe no tax on the $5,000 in benefits they receive from Dick's company. In addition, Dick and Martha can claim an adoption credit for the entire $7,500 they pay themselves.

Tip: Both the exclusion amount and the adoption credit are partially phased out for single and joint filers with MAGI of $182,520 in 2010 ($182,180 in 2009) and phased out completely for single and joint filers once MAGI reaches $222,520 ($222,180 in 2009).

Caution: You cannot claim both a credit and a tax exemption for the same expense.

Example(s): If Dick and Martha's adoption expenses total $6,500 and Dick's company pays $5,000 through an adoption assistance program, they can claim a credit of only $1,500.

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Dependent Care Assistance: Employee Benefits What is it?

As the family needs of today's workforce change, many employers are providing their employees with some type of dependent care assistance. Dependent care assistance is a benefit whereby your employer pays for your work-related dependent care services. A service is work-related if it allows you to work and if the services are for a qualifying individual's care. A qualifying individual is a dependent under the age of 13, a dependent who is physically or mentally incapable of caring for him or herself, or a spouse, if he or she is physically or mentally incapable of caring for him or herself. The types of dependent care assistance that your employer can provide you with include dependent care assistance programs (DCAP), tax-exempt organizations, voluntary employees' beneficiary associations (VEBA), and dependent care flexible spending accounts (FSAs).

Types of dependent care assistance programs A DCAP provides you with dependent care services. If your employer offers a DCAP, the IRS allows your employer to exclude up to $5,000 per year in dependent care assistance from your gross income. There are two types of DCAPs that your employer can offer: an employer-responsibility program or an employer-assistance program. An employer-responsibility program requires your employer to develop and maintain an on-site facility for your dependents (usually a day-care facility). An employer-assistance program is a program where your employer pays either for dependent care services that you incur when you place your dependent in an off-site facility, or for a counselor to aid you in selecting the appropriate off-site facility for your dependent.

Other types of dependent care assistance In addition to a DCAP, your employer can provide you with dependent care assistance through a tax-exempt organization, a VEBA, or a dependent care FSA. Tax-exempt organization Your employer can offer you dependent care assistance by creating a tax-exempt organization that operates a day-care facility. While you are not eligible for a tax credit for the dependent care assistance that your employer provides through the tax-exempt organization, it enables you to provide your dependents with affordable day care.

Voluntary employees' beneficiary association A VEBA provides for the payment of health insurance, life insurance, disability insurance, or other benefits to its members. If your employer provides you with dependent care assistance through a VEBA, the monetary value of the services you receive is included in your gross income. However, the value of the benefits is not subject to taxation until you receive distributions from the VEBA. Example(s): Bill, who is not married and has no children, is entitled to the dependent care assistance benefits that his employer offers through a VEBA. However, the value of the benefits is not taxable income to Bill unless he enrolls a child in the day-care facility.

Dependent care flexible spending account A dependent care flexible spending account (FSA) allows you to contribute pretax dollars to an account that your employer can later use to reimburse you for qualified dependent care expenses. In order for your dependent care expenses to qualify for reimbursement under an FSA, they must be necessary for employment and, if you are married, for employment of your spouse as well. The IRS allows your employer to exclude up to $5,000 per year from your gross income in order to fund the account. In addition, any contributions that you make to fund the account are tax exempt.

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Tip: In order to claim the exclusion for dependent care expense reimbursements, you must list on your federal income tax return the name, address, and taxpayer identification number of the person or party that provides dependent care to your dependents.

Dependent care tax credit If your employer does not offer dependent care assistance, you may be eligible for an individual tax credit. The IRS allows you to claim a dependent care tax credit if you maintain a household for a qualifying individual and incur employment-related expenses. A qualifying individual is a dependent under the age of 13 or a dependent or spouse who is incapable of self-care. Employment-related expenses are expenses that you incur in order to be gainfully employed. The tax credit allowable ranges from 20 to 35 percent of qualifying expenses, depending upon your adjusted gross income (AGI). The qualifying expenses on which the tax credit is based are limited to $3,000 for one qualifying dependent and $6,000 for more than one qualifying dependent. If there is more than one qualifying dependent, the expenses that are taken into account for purposes of the $6,000 limit do not have to be attributable to more than one dependent.

Example(s): Cindy Smith, a single parent, has $30,500 of AGI and pays $3,500 per year to keep both of her children, ages two and five, in day care. Since both of Cindy's children are qualifying individuals, the higher tax credit limit applies and all of her day-care expenses ($3,500) fall within her available tax credit. Assuming that Cindy's allowable tax credit is 20 percent, she can claim a $700 tax credit.

Caution: Expenses that are eligible for the dependent care assistance tax credit must be offset by expenses that you exclude from your income under a dependent care assistance plan.

Example(s): Cindy Smith, a single parent with two children, has $4,800 in eligible dependent care expenses during the year. Cindy's employer reimburses her for $3,800 of the dependent care expenses. Only the remaining $1,000 ($4,800 - $3,800) would be eligible for the dependent care tax credit.

Tip: If you have child-care expenses that exceed the credit limit and you are eligible to participate in a company-sponsored dependent care assistance plan, you may have to choose between the company plan and the dependent care assistance tax credit. Your choice will hinge upon a number of factors, including your tax rate, whether or not amounts that would otherwise be allocated to child care under the company plan can be allocated to other benefits, your filing status, and your AGI. Tip: For more information on the IRS dependent care tax credit, see Section 21 of the Internal Revenue Code.

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Education Assistance as an Employee Benefit What is it?

Today, the rising cost of higher education prevents many employees from furthering their education. Your employer may be able to offer you the opportunity to continue your education by providing you with educational assistance. Employer-sponsored educational assistance can help you improve your skills through education that you otherwise may not have been able to afford. In addition, the IRS treats certain types of educational assistance as nontaxable income. There are a number of ways for your employer to provide you with educational assistance, including educational assistance plans (EAPs), educational reimbursement programs (ERPs), tuition reduction programs, educational benefit trusts (EBTs), scholarships/fellowships, and training programs.

Caution: The IRS sometimes treats educational benefits that exceed certain limits as taxable income.

Educational assistance plans Under an educational assistance plan (EAP), your employer pays for expenses that you incur for education. The IRS interprets the term "education" broadly to include any type of training or instruction that improves the employee's skills. In addition, the education need not be part of a formal degree program. Generally, the education expenses include tuition, fees, books, and supplies. If your employer's EAP meets IRS guidelines, the IRS allows your employer to reimburse you up to $5,250 per year tax free for educational expenses (both undergraduate and graduate) that are not job-related.

Tip: If you are an employee who is active, retired, or disabled, you can receive benefits from your employer's EAP. In addition, if you are a former employee, you can continue to receive benefits from an EAP regardless of the circumstances of your termination.

Tip: If your employer's educational assistance exceeds the $5,250 limit, you may still be able to receive tax-free educational assistance if it qualifies as a working condition fringe benefit. Working condition fringe benefits include any service or property that your employer provides to you such that if you paid for the property or service yourself, you could claim the payment as a deductible business expense.

For more information on IRS guidelines for EAPs, see Section 127 of the Internal Revenue Code.

Educational reimbursement program Under an educational reimbursement program (ERP), your employer either fully or partially reimburses you for education and training. Your employer can exclude ERP reimbursements from your gross income if they qualify as working condition fringe benefits. Working condition fringe benefits include any service or property that your employer provides to you such that if you paid for the property or service yourself, you could claim the payment as a deductible business expense.

In order for educational reimbursements to qualify as working condition fringe benefits, the cost of the education must be for job-related education. If the course maintains or improves skills that you use in your present job, or if it is required by your employer in order for you to keep your present job, it is job-related and therefore excluded from your gross income as a working condition fringe benefit. On the other hand, if the education helps you satisfy the minimum qualification requirements for your present job or qualify for a new trade or business, the education is not job-related, and your employer cannot exclude the expenses from your gross income.

Tip: There is no dollar limit on exclusions for educational reimbursements if they qualify as working condition fringe benefits.

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For more information on working condition fringe benefits, see section 132 of the Internal Revenue Code.

Tuition reduction program If you work for a school, college, or university, your employer may provide either full or partial tuition reduction for either you or your family members. In order for your employer to exclude the cost of the tuition reduction program from you or your family member's gross income, your employer must be an educational organization that offers tuition reduction to the following individuals: employees, retired employees, employees separated from service due to disability, surviving spouses of deceased employees, spouses of employees, dependent children of employees, and children of a deceased employee if both parents are dead. An educational organization is an organization whose primary function is the presentation of formal instruction, that normally maintains a regular faculty or curriculum, and that has a regularly enrolled body of students in attendance at the place where it carries on educational activities.

Tip: Tuition reduction only applies to education below the graduate level.

Educational benefit trust An educational benefit trust (EBT) is a trust arrangement that allows your employer to accumulate funds to pay educational expenses for your children. If your employer properly structures the EBT, the EBT can defer tax on the educational benefits that your employer provides to your children until the benefits are paid out.

Scholarships and fellowships Employee scholarships provide you with funds to further your education at an educational institution. Employee fellowships provide you with funds to assist you in the pursuit of additional study or training. As long as certain qualifications are met, both employer-provided scholarships and fellowships are excludable from your gross income.

Training programs Your employer may provide you with on-the-job training for a number of reasons, such as employee orientation or computer training. The IRS allows your employer to exclude the fair market value of on-the-job training from your gross income, since it is job-related and therefore qualifies as a working condition fringe benefit. Training programs are job-related because they either maintain or improve skills that you use in your present job, or because your employer requires them in order for you to keep your present job. Working condition fringe benefits include any service or property that your employer provides you with such that if you paid for the property or service yourself, you could claim it as a deductible business expense.

Deductibility of educational expenses If your employer does not provide you with educational assistance, or if your employer's educational assistance only lasts within certain limits, you may be able to deduct some or all of your qualified higher educational expenses. If your adjusted gross income (AGI) is less than $65,000 ($130,000 for joint filers), the maximum deduction you're entitled to is $4,000. If your AGI is between $65,000 and $80,000 ($130,000 and $160,000 for joint filers), a maximum deduction of $2,000 is available.

This deduction for higher education expenses can't be claimed for expenses that were paid with tax-free withdrawals from a Coverdell education savings account, or that were used to determine the amount of interest that can be excluded from income on the redemption of certain U.S. savings bonds.

Caution: This deduction is not available for the 2010 tax year.

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Disability Insurance: Employee Benefits What is it?

In general The inability to work due to physical or mental incapacity is a major cause of concern among many employees.

Your employer can help alleviate some of this concern by providing you with the security of a disability insurance plan. Disability insurance provides you with benefits when you have a disability and are unable to work. There are three types of disability insurance plans: temporary disability (including sick leave plans and short-term disability), long-term disability, and permanent disability.

Tip: There is usually a waiting period before you can receive your disability insurance benefits.

Tip: You may also be eligible for disability benefits from government-sponsored disability insurance programs.

Federal income tax treatment of disability insurance plans Whether or not your group disability insurance benefits are taxable depends on who pays the premium. If you pay the total premium using after tax income, then your benefits will be tax free. On the other hand, if your employer pays the total premiums and deducts them as an expense, then your benefits will be taxable (to the extent that such payments don't represent reimbursement for medical care and payments for permanent injury or loss of bodily function). If your employer pays part of the insurance premium and you pay the rest, then your tax liability will be split as well. Any part of the benefit you receive that is attributable to the employer-paid share of the premium is taxable (to the extent that such benefit doesn't represent reimbursement for medical care and payments for permanent injury or loss of bodily function). Any part of the benefit attributable to your share of the premium and any benefit that represents reimbursement for medical care and payments for permanent injury or loss of bodily function is tax free.

Example(s): Bill was covered by a group disability insurance plan at work. His employer paid 60 percent of the monthly premium and Bill paid 40 percent using after tax dollars. When he became disabled, Bill received a $1,000 benefit monthly for six months ($6,000). When he filed his income taxes, he only had to pay tax on $3,600 (60 percent of $6,000), the portion attributable to his employer's contribution.

Temporary disability Sick leave plans Under a sick leave plan, your employer either wholly or partially reimburses you for lost wages as a result of a sickness or accident that lasts for a short period of time (usually no longer than six months). Sick leave plans usually provide benefits for a specific number of days each year. Your employer can allow employees to either accrue sick days on a monthly basis or allocate a certain number of sick days each year. Your employer usually self-funds the plan himself or herself. If your employer offers a sick leave plan, sick leave is included in your gross income as wages.

Tip: Under a sick leave plan, your employer has the option of allowing you to carry over any sick days that you do not use to the following plan year.

Example(s): John works for a canned spinach factory. The factory allows its employees to earn one day of paid sick leave for each month of full-time employment. After a year of full-time employment with the factory, John has used only 3 of his 12 earned sick days. The factory allows John to carry over the 9 remaining sick days to the following plan year.

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Short-term disability Short-term disability plans are the most common type of disability insurance that employers offer to their employees. Short-term disability bridges the gap between sick pay and long-term disability coverage by providing benefits to employees to cover temporary disabilities for a limited time period (typically, less than one year). The length of disability coverage under a short-term disability plan can last anywhere from a few months to up to one year. Under a short-term disability plan, an employee is considered to have a disability when that employee is unable to perform his or her regular duties.

Tip: If your employer provides short-term disability insurance, he or she must also provide female employees with benefits during pregnancy and childbirth.

Tip: Insurance companies will differ in their interpretation of the beginning of a new period of disability. Some companies require that you return to work for one day, whereas others require a few months of continuous active employment.

Example(s): John, who works at the local canned spinach factory, was out of work for three weeks due to a back injury he received while playing golf. Just three days after John returned to work, he reinjured his back while helping his sister move into a new apartment. Thankfully, the disability insurance company interpreted John's new period of disability as beginning the day after he returned to work.

Long-term disability Long-term disability insurance usually provides benefits to employees who are disabled as a result of sickness or accident and who are unable to work for a lengthy time period, usually longer than six months. The benefits an employee receives from long-term disability insurance are usually 50 to 70 percent of their predisability pay.

Typically, the employee can receive long-term disability benefits up until he or she reaches age 65. The definition of disability will vary from policy to policy.

Tip: Since long-term disability plans do not have to follow nondiscrimination rules, your employer can reduce the plan's overall costs by offering the plan to only a select group of employees.

Tip: Long-term disability benefits usually do not kick in until you use up all of your short-term disability benefits.

Example(s): John, who works at the local canned spinach factory, injured his back while playing golf. John was entitled to one year of short-term disability benefits. Almost a year after he first injured his back, John was still out of work, and his short-term benefits were about to run out.

Luckily, the canned spinach factory offered its employees additional long-term disability benefits that will take effect once John's short-term benefits run out.

Permanent disability In addition to short-term and long-term disability benefits, if you become permanently disabled before you reach age 60, you may be able to receive permanent disability benefits through provisions contained in your employer-provided group life insurance policy. A permanent disability is a disability that prevents you from being able to work at any job. A typical life insurance provision used for permanent disabilities is a waiver of premium. A waiver of premium life insurance provision continues coverage of an employee who becomes disabled. The coverage lasts until the employee's death and does not require payment of any premium.

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Welfare Benefit Funds as an Employee Benefit What is it?

A welfare benefit fund is a method of funding an employee welfare benefit plan. Welfare benefit plans include benefits for sickness, accident, disability, death, unemployment, vacation, training programs, day- care centers, scholarship funds, prepaid legal services, and holiday or severance pay. A welfare benefit fund allows your employer to prefund your employee welfare benefit plan by making deposits into the fund and using those deposits to purchase the welfare benefits at a later date.

There are two types of welfare benefit funds: the welfare benefit trust, also known as a taxable trust; and the voluntary employees' beneficiary association (VEBA), also known as a nontaxable trust. A welfare benefit trust is known as a taxable trust since the income that the trust generates is subject to taxation. A VEBA is known as a nontaxable trust since a VEBA is generally treated as a tax-exempt entity under the Internal Revenue Code.

The benefits you receive from either a welfare benefit trust or a VEBA are subject to taxation based on the applicable tax rules for that employer-provided benefit under the Internal Revenue Code. If the value of a benefit is excluded from income when provided directly by the employer, then it will similarly be excluded from income if the benefit is provided through a welfare benefit trust or VEBA. However, if the benefit that you receive from your welfare benefit trust or VEBA would not otherwise be excluded from your income if provided directly by your employer, then you will be required to include the value of the benefit received from the welfare benefit trust or VEBA in your income.

Example(s): XYZ Company provides its employees with a health insurance plan and funds the plan by using a VEBA. Since the IRS excludes the value of health insurance benefits from your gross income, you are not subject to tax on the value of the health insurance provided by the VEBA. Tip: A welfare benefit fund provides you with benefit security, since the amounts that your employer places within the fund are held in trust for the exclusive benefit of employees, out of a possible creditor's reach.

Caution: There is no settled terminology in the area of welfare benefit funds. For instance, the term welfare benefit trustis sometimes used interchangeably with the term VEBA.

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Legal Services Plan as an Employee Benefit What is it?

A legal services plan, also known as a prepaid legal services plan, is a plan in which your employer provides you with personal legal services in exchange for a contribution or premium. A legal services plan can provide you with adequate legal representation when you normally cannot afford a lawyer. Prior to July 1, 1992, employees were allowed to exclude employer contributions to a group legal services plan from their gross income. Unfortunately, the exclusion for group legal services plans has since expired. Now, any contributions, payments, or services under a group legal services plan are included in your gross income. As a result, you are subject to taxation under a group legal services plan as follows: • If your employer prefunds the plan (pays a group legal insurance premium to an insurance company), you are taxed on your share of the premium at the time your employer pays it, as long as you are legally entitled to receive benefits under the plan. Thereafter, the benefits should be received tax free. • If you employer pays for benefits out of current revenues as you receive the benefits, you are taxed on the value of the benefits as you receive them.

Tip: While the exclusion for group legal services has since expired, Congress periodically considers legislation that would reinstate the exclusion.

Tip: The exclusion was limited to an insurance cost of $70 per year.

In addition to your employer, a labor union might also offer a legal services plan.

Types of legal services plans There are two types of group legal services plans. The first type is an access plan that provides basic legal advice over the phone and is for informative purposes only. The second type is comprehensive and includes legal advice over the phone along with additional legal services.

Tip: While the exclusion for group legal services is currently not available, it is nevertheless possible for you to receive tax-free legal services. You can receive tax-free legal services if the service that you receive qualifies as either a de minimis fringe benefit (you receive a small amount of legal services from a member of an in-house legal staff) or a working condition fringe benefit (the legal services are job- related).

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Company Car as an Employee Benefit What is it?

If you have a nondeductible/nonbusiness commute that is extensive, or significant business-related travel, you may want to look into whether or not your employer provides employees with the use of a company car. If you use a company car for business-related purposes, it can qualify as a working condition fringe benefit. A working condition fringe benefit includes any property or service that your employer provides to you such that if you paid for the property or service, you could deduct it as a business expense. Your employer does not have to include the value of a working condition fringe benefit from your gross income. However, if you use the car for personal reasons, it qualifies as a non-working condition fringe benefit and your employer must include the value of your personal use of the car in your gross income. There are two ways for your employer to determine the value of a company car to include in your gross income: the general valuation rule and the special valuation rules.

General valuation rule If you use the car for personal use, your employer can determine the value of the company car fringe benefit by using the general valuation rule. Under the general valuation rule, your employer must include, in your gross income, any amount by which the fair market value (FMV) of a fringe benefit is greater than: • The amount you paid for the benefit, and • The amount excluded by some other section of the Internal Revenue Code The FMV of a company car is the amount you would have to pay a third party to lease the same or a similar car in similar circumstances.

Special valuation rules In addition to the general valuation rule, your employer may also elect to determine the value of your personal use of a company car to include in your gross income by using the special valuation rules.

Annual lease value If your employer provides you with a company car for an entire year, he or she can use the car's annual lease value (see the Annual Lease Value table in Section 1.61-21(d) of the Federal Tax Regulations) in order to determine the value of the car to include in your gross income. If your employer provides you with a car for less than one year, the value of the benefit to include in your gross income is either that of a prorated annual lease or a daily lease value.

Vehicle cents-per-mile rule Another way for your employer to determine the value of the company car is to use the vehicle cents-per-mile rule. Under the vehicle cents-per-mile rule, your employer values the car by using a standard mileage rate and multiplying it by the total miles you drive for personal reasons.

Commuting rule The commuting rule values the use of a company car at $1.50 per one-way commute for each employee who commutes in the car.

Tip: If your employer provides you with transportation due to unsafe conditions, the value of the use of the transportation is $1.50 per one-way commute.

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Deductibility of car expenses If your employer does not provide you with a company car, you may still be eligible for a tax deduction if you use your car for business purposes. You are allowed to deduct expenses you incur while using your car for business purposes. There are two ways for you to determine the expenses you incur while using your car for business purposes: actual expenses and the standard mileage rate.

Tip: If you qualify for a deduction under both actual expenses and the standard mileage rate, you should determine your deduction using both methods in order to see which one gives you a larger deduction.

Tip: If you use your car for both business and personal purposes, you must divide your expenses between business and personal use.

Example(s): Bill Smith drives his car 10,000 miles during the year, 8,000 for business use and 2,000 for personal use. Bill can claim an 80 percent deduction (8,000/10,000) of the cost of operating his car as a business expense.

Tip: If you deduct the business use of a car, or your employer excludes the value of the car from your gross income, the IRS will require you to substantiate it with records. The records should contain the date of each use, mileage, and the business purpose of the trip. Records must be kept at or near the time of the use. If there are no written records, you may provide a statement containing specific information related to the car's use or other corroborative evidence sufficient to establish use. Without written records, the IRS may disallow the exclusion.

For more information on actual expenses and the standard mileage rate, see our separate topic discussion, Business Use of Autos.

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Moving Expense Reimbursement as an Employee Benefit What is it?

If certain requirements are met, you may be able to exclude the value of any employer-provided, qualified moving expense reimbursements from your gross income (exceptions apply to members of the armed forces). A qualified moving expense reimbursement is any amount that you receive from your employer as payment for or reimbursement of expenses that would have been deductible as moving expenses if you had directly paid or incurred them.

Deductible moving expenses Deductible moving expenses include the moving of household goods and personal effects from the former home to the new home, and traveling from the former home to the new home.

Tip: Deductible moving expenses do not include expenses you incur selling, buying, or looking for a home.

Requirements for deductibility The following requirements must be met in order for your moving expenses to be deductible (or qualify for the exclusion from income if reimbursed by your employer): • You must incur the expenses in connection with the start of work at a new principal place of employment.

• The distance between your new principal place of employment and your former residence must be at least 50 miles greater than the distance from your former place of employment to your former residence. If you go to work full time for the first time, your place of work must be at least 50 miles from your former home to meet the distance test. If you go back to full-time work after a substantial period of part-time work or unemployment, your place of work must also be at least 50 miles from your former home.

• You are a full-time employee in the general location of your new place of employment for at least 39 weeks of the 12-month period immediately following your arrival at your new location. If you are self-employed, you must be employed or performing services at the new location for at least 78 weeks out of 24 months immediately following the move and at least 39 weeks of the first 12 months after the move.

Tip: You can still deduct your moving expenses even if you have not yet met the 39-week or 78-week time test by the date your tax return is due, as long as you expect to meet the time test in the following tax year.

Tip: If you are reimbursed by your employer for your expenses, you can exclude the reimbursement from income, but you cannot deduct your otherwise deductible moving expenses (to the extent that they were reimbursed).

Tip: Your employer can reimburse you either directly or indirectly for qualified moving expenses.

Tip: If your employer does not reimburse you for qualified moving expenses, you can claim them as a deduction on your individual tax return.

Tip: There is no dollar limit on the moving expense deduction, but the expenses must be reasonable.

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For more information, see our separate topic discussion, Moving Expenses.

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Life Insurance as an Employee Benefit What is it?

In general Life insurance is a contract whereby the insurance company pays a sum specified within the contract to a named beneficiary upon the death of the insured, in exchange for the payment of an agreed upon premium. If your employer offers life insurance as an employee benefit, it most likely will be in the form of group life insurance.

Group life insurance provides insurance for a group of employees through a contract that exists between an employer and an insurance company. The actual group life insurance is usually issued to the employer rather than to each individual employee. This contract is known as the master contract and provides coverage for the entire group. In lieu of having the actual contract in hand, the insurance company will issue each employee a certificate of insurance as proof of coverage. Although you as an employee are not a party to the master contract, you still are able to enforce your legal rights under the master contract as a third party beneficiary.

Generally, group life insurance mirrors the types of life insurance policies that are available on an individual basis, such as term, whole, and universal. If a group life insurance policy is permanent, it accumulates cash value. In other words, any excess funds that you pay towards the permanent contract (the part of the premium that exceeds the cost of providing the death benefit) builds up equity in the policy. Cash value life insurance provides protection, in addition to accumulating cash within the policy for your future use. Cash value can be a useful tool for the individual policyholder because it offers the opportunity to obtain a policy loan or to surrender the policy. If a group life insurance policy is a term one, it provides protection as long as the premium is paid. A term policy does not accumulate cash value that you can draw upon in the future. While term insurance does not accumulate cash value, it requires minimal cash outlay in the beginning and does not require a long-term commitment.

Tip: Some companies will provide insurance to their employees by making payroll deductions to any insurer. Many companies will offer employees insurance at no cost (e.g., one to two times an employee's annual salary), and allow employees to purchase additional insurance with low premiums.

Advantages of group life insurance In addition to the obvious advantage of providing your beneficiaries with funds upon your death, a group life insurance policy can offer many additional advantages. Typically, the cost you incur funding a group life insurance policy must be included in your gross income. However, there are certain limited exceptions (e.g., the first $50,000 of group term life insurance), although it is rare that these exceptions apply to the average employee. In addition to its possible tax benefits, group life insurance usually does not require medical underwriting. Individual life insurance policies generally require the insurance company to evaluate your health in order to prove to the company that you are insurable. If you are in poor health, it is likely that an individual policy may require you to pay high premiums or that the company may not find you insurable. With a group life insurance policy, the insurance company does not perform medical underwriting on an individual basis. Instead, you may be asked a series of simple medical questions while the characteristics of the group as a whole (e.g., size, stability, and group makeup) are evaluated.

Tip: A group life insurance plan qualifies as an ERISA welfare benefit plan and is subject to ERISA rules.

Caution: Since group term life insurance is a contract between your employer and the insurer, your employer can terminate a group term life insurance plan at any time.

Caution: If you change jobs, you will lose coverage under your group life insurance plan. However, you may be able to convert your group coverage into an individual policy.

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Group term life insurance In general Group term life insurance is a contract between an employer and an insurance company that lasts for a specific period of time (usually until you retire, reach a certain age, or leave the company) and provides death benefits upon your death.

Caution: Since a group term life insurance plan provides only term coverage, it does not accumulate any cash value.

Tip: Since you may only have to pay a small portion of the premium for a group term life insurance policy, group term life insurance can be a low-cost method of providing your beneficiaries with death benefits.

Group life insurance carve-out plan Under a group life insurance carve-out plan, your employer removes certain highly compensated employees from the group term life insurance plan coverage and provides those employees that were "carved-out" with individual life insurance policies.

Caution: One of the major disadvantages of a carve-out plan is that because it is an individually based plan, it is likely to require you to be individually underwritten. If you have health problems, you should be aware that you may have a heavy policy rating or be deemed uninsurable under an individual plan.

Contributory or noncontributory Under a group term life insurance policy, your employer usually pays for a base amount while you pay for any supplemental amounts. The amount of the premium that your employer pays depends on whether the policy is contributory or noncontributory. If a group term life insurance policy is contributory, your employer pays the majority of the premium, while you pay a small portion of the premium. If a policy is noncontributory, your employer pays the entire premium.

Beneficiary designation You are free to name any person or persons who you want to receive the proceeds of your group term life insurance policy upon your death. In addition, you can name your beneficiary on either a revocable or irrevocable basis.

Death benefit coverage Generally, the amount of death benefit coverage you have under a group term life insurance policy is determined by using a benefit schedule. However, some plans may place a ceiling on the amount of coverage that the policy provides.

Example(s): Example 1: Mary works for XYZ Company and earns an annual salary of $30,000.

Mary's group term life insurance policy provides death benefit coverage in an amount that is equal to twice her annual salary, or 2 x $30,000 = $60,000.

Example(s): Example 2: Mary works for XYZ Company and earns an annual salary of $60,000.

Mary's group term life insurance policy provides death benefit coverage in an amount that is equal to twice her annual salary, with a $100,000 limitation on the coverage amount. As a result, Mary would not receive $120,000 (or 2 x $60,000) worth of coverage, but a death benefit of $100,000.

In addition to being based on your annual salary, death benefit coverage can be a set amount (e.g., $50,000) for all employees.

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IRS tax treatment of group term life insurance In general As long as your group term life insurance plan meets certain requirements, you can exclude the cost of the first $50,000 of insurance from your gross income. The cost of any amount over the $50,000 limit must be included in your gross income, unless you pay for the coverage with after-tax dollars.

Tip: The amount over $50,000 that is included in your gross income is known as imputed income.

Tip: In order for a group term life insurance plan to qualify for the $50,000 exclusion, it must meet the requirements of Section 79 of the Internal Revenue Code.

Exception to $50,000 limit Generally, the cost of employer-provided group term life insurance that exceeds $50,000 is taxable to you. If you fall within an exception, the cost of group term life insurance that exceeds $50,000 is not included in your gross income. Group term life insurance costs that exceed $50,000 are not taxable to: • Retired employees who fall within a special grandfather rule • Employees who have terminated employment because of disability • Employees whose beneficiary under the policy is their employer (either directly or indirectly), or • Employees whose beneficiary under the policy is a charitable organization Dependent group term life insurance The cost of group term life insurance on the life of your spouse or dependent (also known as employer-provided dependent group term life insurance) is included in your gross income. However, the cost is not included in your gross income if you pay for it on an after-tax basis. In addition, the cost of dependent group term life insurance can be excluded from your gross income as a de minimis fringe benefit if the face value of the insurance payable on either your spouse's or dependent's death is limited to under $2,000.

Exclusion of death benefits from your beneficiary's gross income In order for an individual to be able to exclude death benefits (any amount that he or she receives from a life insurance policy as a result of your death) from his or her gross income, the individual must be a beneficiary and the amounts paid must be by reason of the death of the insured.

Group whole life insurance In general Under group whole life insurance, you pay a fixed premium either over your lifetime (ordinary life) or over a shorter period of time (limited pay life). While many variations of the group whole life insurance policy exist, it is mainly a mixture of both term and permanent insurance. Your premium payment usually goes to the permanent insurance portion, while your employer's payment goes to the term insurance portion. Group whole life insurance allows your employer to offer employees employer-paid term insurance with the additional coverage of a permanent group life insurance plan.

Example(s): Bill works for XYZ Company. XYZ offers its employees a group whole life insurance policy. XYZ pays a portion of the premium that purchases the term life insurance, while the employee pays the premium for any permanent coverage. Bill can elect to receive only the term life insurance and have the premium paid completely by XYZ. In addition, Bill can choose to have both

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term and permanent coverage. In this case, he will be personally responsible for that portion of the premium that purchases the permanent coverage.

Tip: Since premium payments are fixed under a group whole life insurance policy, payments cannot be made in lump sums.

Tip: Since group whole life insurance is a permanent type of life insurance, it accumulates a cash value. The cash value of most group whole life insurance policies grows at a set rate. However, if a group whole life insurance policy is interest sensitive, the cash value grows at an interest rate that is subject to change. In addition, if a group whole life insurance policy is current assumption whole life, the interest rate, policy premium, and death benefit that are credited to the cash value of the policy may vary.

Tip: When you retire, you can choose to either surrender the policy or continue your coverage by paying the premiums yourself.

Dividend options If a whole life insurance policy is "participating," it allows you to receive annual dividends. Usually, a participating whole life insurance policy offers a variety of dividend options from which to choose, such as buying paid up additions, reducing the policy's premium, accumulating at interest, buying additional term life insurance, or refunding the excess premiums as cash. If you use dividends to buy paid up additions, the insurance company uses each dividend to purchase you an additional amount of life insurance that does not require premium payments. If you use dividends to reduce the policy's premium, you pay a lower premium, but the death benefit of the policy will remain the same. If the insurance company pays the dividend to you in cash, the policy premium and the death benefit remain the same. If you choose to let the dividends accumulate at interest, the dividends stay with the insurance company, which pays a set rate of interest on the dividends. Finally, if you choose to buy additional term life insurance with your policy dividends, the insurance company will purchase term life insurance on your behalf.

Nonforfeiture options If you are unable to pay your group whole life policy premium, you have two options: surrender the policy for cash value or exercise a nonforfeiture option. While you can surrender your group whole life insurance policy for its cash value at any time, if you surrender the policy, any death benefit coverage that you had under the policy terminates immediately. If you choose to exercise a nonforfeiture option, some of your death benefit coverage will remain, either for a shorter period of time or a lesser amount of coverage.

Generally, nonforfeiture options come in two forms: paid up term life insurance and reduced paid up whole life insurance. If you choose the paid up term life insurance nonforfeiture option, your premium payments end and you are left with a term policy that provides a certain amount of death benefit coverage for a specific period of time.

Example(s): John wants to end his premium payments for his whole life insurance policy. However, John has a child for whom he still wants to provide death benefit coverage. John can exercise the paid up term nonforfeiture option that can end his premium payments, but still offer death benefit coverage for his child.

If you choose the reduced paid up whole life nonforfeiture option, you use the cash value of the policy to purchase life insurance on a paid up basis.

Tip: Unless a policy has been held for many years, you may receive only a percentage of a policy's cash value upon surrender. An insurance company may seek reimbursement for unrecovered costs by issuing surrender charges on a policy's existing cash value. In today's transient job market, employees tend to move from job to job before surrender charges disappear.

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Group universal life insurance In general Under a group universal life insurance policy, you can choose to either pay a minimum premium or fully fund the policy. By paying the minimum premium, you cover the cost of keeping the policy in effect. However, the minimum premium is usually not enough to accumulate a large amount of cash value. On the other hand, you can choose to fully fund the policy. If you fully fund the policy, you can cover the cost of keeping the policy in effect, while at the same time, accumulating a large amount of cash value. Minimum premium payments may be a good idea for an individual who cannot afford to spend a lot of money on insurance premiums. Fully funding a plan is a useful tool for the employee who wants to limit his or her premium payments during retirement, or to accumulate funds in the policy for use at a later date.

Tip: Unlike group term life insurance, group universal life insurance is not governed by Section 79 of the Internal Revenue Code. Group universal life insurance is taxed the same as if you purchased a universal life insurance policy on an individual basis. As a result, you cannot deduct premiums that you pay from your gross income.

Caution: The interest rate that is credited to your universal life insurance policy's cash value is subject to change by the insurance company.

Selection of amount of death benefit coverage In addition to choosing the type of premium payment, group universal life insurance allows you to choose the amount of death benefit coverage for your policy. Most policies will offer you a few choices, usually an amount that is equal to one-half, one, or two times your annual salary. The policy will normally impose a minimum death benefit level so that, even if one-half of your salary is less than the minimum amount, you must choose the minimum amount in order to participate.

Example(s): XYZ Company offers its employees a group universal life insurance plan. The plan offers a few choices for the amount of death benefit coverage you can have. These choices include one or two times your annual salary. In addition, the policy has minimum death benefit coverage of $15,000. Richard, an employee of XYZ, earns an annual salary of $60,000 and chooses the death benefit equal to two times his salary for a total of $120,000 in death benefit protection. Mary, an employee of XYZ, earns an annual salary of $28,000 and chooses the death benefit equal to one-half her salary or $14,000. Because the XYZ policy has a minimum death benefit selection of $15,000, and because one-half of Mary's salary is less then the minimum amount required, Mary's death benefit coverage would be $15,000.

Usually, a universal life insurance policy will offer a choice between two benefit options: Option A and Option B. Option A provides a death benefit coverage that remains constant.

Example(s): Mary's coverage under a universal life insurance policy begins at age 35. Mary chooses an Option A death benefit coverage of $100,000. Twenty years later, when Mary is 55 years old, the death benefit coverage of her policy will still be $100,000.

An Option B death benefit coverage does not remain constant. Instead, it increases over time in proportion to the increases in the policy's cash value. The death benefit coverage under Option B is equal to the policy's face value plus the policy's cash value.

Example(s): Mary has a universal life insurance policy with death benefit coverage of $100,000.

After five years of coverage, Mary's policy has accumulated $5,000 of cash value. If Mary chooses death benefit coverage Option B, her policy's death benefit coverage in year five will be $105,000.

Tip: The amount of death benefit coverage provided under a group universal life insurance policy can be either increased or decreased, depending on your individual needs.

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Split dollar life insurance In general A split dollar life insurance arrangement, or SDA, is an agreement between you and your employer to share the costs and benefits of a life insurance policy on your life. An SDA is an agreement that concerns (at least in part) the life insurance premium payment (and eventual repayment); it is not a type of policy.

Split dollar arrangements usually take one of two forms. In the endorsement form, the employer is formally designated as the owner of the insurance contract and endorses the contract to specify the portion of the insurance proceeds payable to the employee's beneficiary. In the collateral assignment form, the employee is formally designated as the owner of the contract, and the employer's premium advances are secured by a collateral assignment of the policy.

Caution: The Sarbanes-Oxley Act of 2002 makes it a criminal offense for a public company to lend money to its executives or directors. This may prohibit the use of the collateral assignment form in these companies.

Split dollar life insurance is an important part of the compensation package of many key employees. In a typical split dollar arrangement, the employer funds all or part of the cost of providing an employee with life insurance protection and then recoups the cost either from the cash value of the policy or from the death benefit. Split dollar arrangements have also come into wide use in gift and estate planning.

The IRS has issued regulations as of September 17, 2003 that provide guidance for federal income, employment, and gift tax purposes. For more information, see our separate topic discussion, Taxation of Split Dollar Arrangements.

Key employee life insurance Key employee life insurance is a life insurance policy that insures the life of an employee whose death would cause significant economic loss to a business. Under a key employee life insurance policy, your employer takes out an insurance policy on your life. Your employer becomes both the owner and the beneficiary of the policy and is responsible for paying the premiums. Upon your death, the insurance company pays the death benefits to your employer's business. The proceeds are not included in your employer's income.

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Life Insurance Basics Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources.

Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family.

Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?

Your life insurance needs will depend on a number of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions: • What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?

• How much of your salary is devoted to current expenses and future needs?

• How long would your dependents need support if you were to die tomorrow?

• How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children?

Since your needs will change over time, you'll need to continually re-evaluate your need for coverage.

How much life insurance can you afford?

How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage.

The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What's in a life insurance contract?

A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

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Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits.

The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories: • Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer.

• Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time.

• Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective.

The policyowner selects the subaccounts in which the cash value should be invested.

• Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts.

Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Your beneficiaries You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of

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your beneficiary designations to ensure that your wishes are carried out as you intend.

Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.

Where can you buy life insurance?

You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.

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Group Disability Insurance If you're in the market for disability insurance, you should first find out if you're eligible for group disability insurance. Many employers, schools, trade groups, and professional associations offer group disability insurance to their members, and it can be a low-cost alternative to individual disability income insurance.

The basics of group disability insurance Group disability insurance is a single disability policy that covers many people (a group). The insured group has a common interest or association, such as an employer, a trade, or a school affiliation. All eligible individuals may be covered by the policy, and the cost of group coverage is often less expensive than the cost of individual coverage. The plan may be contributory (you must sign up for coverage and contribute toward the premium payments) or noncontributory (funded by the employer or association, and you are automatically covered if you meet eligibility requirements).

When you apply for group disability insurance, you are not issued an individual policy, nor are you evaluated for coverage as an individual. Instead, the policy is issued to the organization or company that represents the group (the master policyholder). The individuals within the group that apply for disability insurance are issued certificates of coverage rather than individual policies. These certificates are proof that coverage exists, and they contain information about the amount and type of coverage provided.

Instead of paying premiums to the disability insurance company, you pay them directly to the master policyholder (if this is your employer, often through payroll deduction). If you pay either part or all of your premium cost, your group plan is said to be contributory. If the master policyholder (e.g., your employer) pays the entire premium cost, the plan is said to be noncontributory. For the plan to remain in effect, most or all of the group's members must want to be included and have coverage. If the plan is noncontributory, 100 percent of eligible group members must be covered by the plan. If the plan is contributory, usually 75 percent or more of eligible members must be covered by the plan. When enrollment levels drop, the group must find new participants from the eligible pool of members.

Eligibility rules To be eligible for coverage under a group disability plan, you must meet the following requirements: • You must be a member of the group: To be eligible for group disability coverage, you must be affiliated with, or be a member of, the group offering coverage. • You must meet the eligibility requirements outlined in the group policy: Not all members of the group may be eligible for group coverage. Although a group plan cannot bar an individual from coverage, it can bar a group of individuals from coverage until certain eligibility criteria, such as length of employment, are met. • You must enroll: When enrolling in a contributory group disability plan, you must fill out and sign paperwork pertaining to the insurance contract.

Keep in mind that if you enroll during an open enrollment period, you may not have to prove that you are insurable (depending on the size of your group). In other words, you don't have to show proof that you are healthy or take a physical. However, if you don't enroll during an open enrollment period and later decide you want coverage, you may have to prove insurability at that point, or you may have to wait until the next open enrollment period.

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Advantages of group disability coverage Group disability policies often have fewer underwriting restrictions than individual disability policies. That's because the risk of disability is borne by the group rather than by an individual. A fairly large group will include mostly individuals who are good risks, as well as a few individuals who are poor risks. Even though individuals enrolling in a group disability plan will not have to pass a physical exam, they will have only a limited enrollment period to take advantage of this provision. This helps to prevent individuals with health problems from enrolling after they have discovered that they are sick.

Another big advantage of group disability insurance is that premiums are much lower than premiums for individual disability insurance policies because it's more cost effective to underwrite insurance for a group than for individuals.

Disadvantages of group disability coverage "You can't take it with you" is a phrase that normally applies to group disability coverage. When you leave your job or otherwise terminate your relationship with a group, you can't take your coverage with you. In addition, you normally cannot convert it to an individual disability policy. This means that you may be left without disability coverage when you need it, and if you develop a medical problem, you may be unable to buy coverage for that pre-existing condition in the future. That's why if you know you're leaving your job, consider applying for individual disability coverage before you quit. Assuming that you are insurable, this will ensure that there will be no lapses in your disability coverage.

Another disadvantage of group disability insurance is that premiums can be raised periodically. For instance, association policies usually offer coverage that guarantees that the premium will not rise for one or more years.

However, at the end of the guaranteed period, you may find that you have to pay much more for coverage (if the premium has been raised for the entire group).

Unlike individual disability policies, employer-sponsored group disability benefits will be reduced by payments you receive from workers' compensation, which covers many work-related disabilities; Social Security; and other government programs. In addition, your employer-sponsored group disability policy is likely to define disability as "any occupation" disability. This means that if you're able to work in any occupation (even one outside of your own area of expertise), you won't be eligible for disability benefits. Occasionally, however, group disability plans will incorporate the two definitions, paying benefits in the short term even if you're able to work in another occupation and paying long-term benefits only if you're completely disabled and unable to work in any occupation.

Generally, you'll have to pay taxes on benefits you receive from group plans, whereas individual plan benefits are generally received tax free.

Finally, group disability plans are less flexible than individual disability plans even though they may offer many of the same features. You may be able to personalize your policy somewhat by adding on a rider or two, but you won't end up with a policy that reflects your individual circumstances. Although both individual and group disability policies limit coverage to certain maximums based on income, group policies often do not consider deferred compensation and bonuses when determining the maximum benefit payable. This might hurt you if your earnings are not truly reflected through your salary. In addition, long-term group disability benefits are usually offset by other government benefits, which is generally not the case with individual insurance.

Employer-sponsored group disability insurance If your employer offers disability insurance, it's likely a short-term policy. Short-term disability insurance contracts usually have short waiting periods (1 to 14 days) and are simple to apply for. Although some offer benefits for up to two years, many policies pay benefits for six months to one year. Long-term disability policies are offered less frequently by employers than short-term disability policies. You are more likely to find them offered at medium- to large-sized companies than at smaller ones. Most of these plans pay benefits up to age 65, although they may

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pay lifetime benefits in certain instances.

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Group Health Insurance With group health insurance, a single policy covers the medical expenses of many different people. Unlike individual insurance, where each person's risk potential is evaluated to determine insurability, group health insurance allows all eligible members of the group to be covered by one policy, regardless of their age or physical condition. The premium for group insurance is calculated based on the characteristics of the group as a whole, such as average age and degree of occupational hazard.

When you apply, timing is everything Many employers offer group health insurance as part of their employee benefits package. Other groups that may offer such coverage include churches, clubs, trade associations, chambers of commerce, and special-interest groups.

Although your individual health is generally not evaluated when you apply for group health insurance, you must apply during the specified eligibility period. For employer-sponsored health insurance, this is often the first 30 days of your employment or the first 30 days following your initial probationary period. For insurance offered by an association, this may be the first 30 days of your membership in the group. Both employers and associations may also have an open enrollment period each year, during which you may sign up for coverage, modify your existing coverage, or add dependents to your coverage. There are also time limits for adding dependents (e.g., within 30 days of marriage or the birth of your child).

The purpose of the eligibility period is to reduce insurance costs by preventing people from waiting until after they discover a health problem to sign up for coverage. If you fail to enroll during this period, the insurance company has the right to treat you as though you were applying for individual insurance. This means you'll probably have to answer extensive health questions and submit to a physical examination. The insurance company can then decide whether or not to insure you.

The benefits of group coverage Under a group health insurance plan, the insurance company agrees to insure all members of the group, regardless of their current physical condition or health history. The only requirement is that group members apply for insurance within the specified eligibility period. Clearly, group health insurance is beneficial for those with chronic health conditions who otherwise might be unable to get individual insurance.

Group health insurance is somewhat less risky for insurers than individual insurance, since the risk is spread out among a larger number of people. Within a fairly large group, it's almost certain that the good insurance risks will equal or exceed the bad ones. Because only one policy is issued for the entire group, the cost of establishing and administering group coverage is lower than the cost of issuing an individual policy to each person. This means it generally costs less for you to purchase. And in many cases, your employer or association will pick up some or all of the premiums, making group insurance even more affordable.

The drawbacks of group coverage In a group insurance situation, the provisions of the policy are negotiated between the insurer and the master policyowner (usually an employer or association). Therefore, you can't customize your policy. You don't have the freedom to pick and choose provisions, and your deductible amount and co-payment percentage are determined in advance. In some situations, however, you may be able to choose between two or more insurance plans.

What you should look for in a group policy Sometimes you have to take what you can get, but if possible, look for an insurer that's financially stable--one with an "A" or "A+" rating from A. M. Best, Moody's, or Standard & Poor's. It does you no good to have a great

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insurance policy if your company goes belly-up.

You'll also want to find a policy with the highest lifetime payout possible. Policies with unlimited payouts are less common these days, but anything less than $1 million may be insufficient to cover you in the event of a catastrophic illness.

If you do have a choice between two offered plans, you'll want to think about the limits you set on your out-of-pocket costs. Also, most employer groups review and compare differences in the health policies they provide to their employees, so check with your benefits or compensation manager to get comparable information about the different plans and covered benefits offered. Many managed care companies and other insurance carriers will send you free marketing brochures about the plan benefits. Lower deductibles and co-payments mean that your costs will be lower if you actually do get sick, but you'll pay dearly for this protection. By agreeing to higher deductibles and co-payments, you can cut your insurance premiums dramatically. As long as you retain a reasonable out-of-pocket maximum, you shouldn't have to worry about your medical costs getting out of hand.

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Making the Most of Your Group Health Benefits For millions of Americans, group health insurance offers affordable quality health care. To get the most from this valuable benefit, you need to understand what you have, how lifestyle changes can affect your coverage, and what to do if your coverage doesn't meet your expectations.

Understand what you have Get your plan's summary plan description (SPD) from your plan administrator. It gives a detailed summary of your plan--how it works, the benefits it provides, and how those benefits may be obtained or lost. Look for information on: • Physician choice • Accessibility of doctor's offices • Deductibles • Co-payment requirements • Maximum out-of-pocket expenses • Lifetime benefits • Incentives for using the plan's network of providers • Exclusions • Waiting periods • Prescription benefits • Maternity benefits • Dental and vision benefits • Preventive care programs • Member rights, including the right to appeal • Quality reports and ratings from member-satisfaction surveys

Ask before you need it Don't wait for a serious illness or injury to learn what to expect from your group health plan. Now is the time to find out. Take the time to learn the answers to the following questions: • Do you need prior approval to visit a specialist?

• How does the plan define emergency care?

• How do you get care if you are outside the area?

• What hospitals are in the plan's network?

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• Is there a time limit on hospital stays?

• Who decides when you will be discharged?

• Will the plan pay for follow-up care, such as nursing home care or home health care?

• If you have a serious medical problem, will the plan provide someone to oversee care and make sure your needs are met?

• Are second opinions required for surgery? If so, who pays?

• How do you get ambulance service?

• Is there an advice hot line to help decide how to handle a problem that may not require a doctor's visit?

Be proactive Don't be afraid to ask your doctor questions, and insist on clear answers. If you're concerned that you won't be able to understand or follow a doctor's instructions, bring someone with you or take notes. Take responsibility for your own care. Consider: • Lifestyle choices and changes you can make to lower your risks or prevent illness (e.g., losing weight) • The risks and benefits of any tests or treatments • How you would go about obtaining care after hours

What happens when you lose coverage?

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) allows you to purchase health coverage under your employer's plan if you lose your job, change jobs, get divorced, or upon the occurrence of other qualifying events. Coverage that you obtain under COBRA can last from 18 to 36 months, depending on your situation.

COBRA applies to most employers with 20 or more workers and requires your plan to notify you of your rights.

Most plans require you to make an election for coverage under COBRA within 60 days of the plan notifying you.

Follow up with your plan administrator if you don't get a notice, and make sure that you reply within the allowed time.

When you buy the insurance under COBRA, you must pay the full premium amount, plus administrative costs of up to 2 percent. If you were accustomed to sharing health insurance premiums with your employer, you may be in for a shock. However, if you or any family member have pre-existing conditions, you may not have any other choice, at least until you get into a new group plan. You must remember to pay your premiums on time, or you will lose your coverage.

The medical coverage under COBRA must be identical to the coverage you had before. However, employers may drop benefits such as dental care and vision care.

The American Recovery and Reinvestment Act of 2009 provides that, for involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010, assistance-eligible individuals will only need to pay 35 percent of COBRA premiums for a period of up to nine months. The remaining 65 percent of COBRA premiums will be subsidized. However, this premium subsidy may need to be repaid in some cases.

As your lifestyle changes, so do your insurance needs Review your group health insurance benefits and options when you:

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• Get married • Get divorced • Have a new child • Have a child who is no longer dependent on you • Suffer the loss of your spouse The information provided by your employer should tell you how you can change benefits or switch plans if needed.

Planning for retirement Find out what benefits are available during retirement. Ask your employer's human resources office, union, and plan administrator. Check your SPD. Make sure that all sources agree about the benefits you will receive and if they can be changed or lost. After you have this information, you can make other important choices, such as finding out if you are eligible for Medicare insurance coverage.

What can you do if a claim is denied?

Your plan administrator has a limited time after you file a claim to tell you if you will receive the benefits. If that is not enough time, you must be notified within a specified time why more time is needed and the date you can expect a decision. Many states regulate claims processing and denial notification to members, so be sure to find out your insurance company's time frames for processing claims, issuing denials, and resolving appeals.

If your claim is denied, you must be notified in writing and given specific reasons why it was denied. If you have no answer in the allotted time, the claim is considered a denial, and you can use the plan's rules for appealing the denial. If you disagree with any claims decision or preauthorization denial, you can request an appeal.

It's important to understand how your plan handles complaints. Check your health benefits package and your SPD to determine who is responsible for handling problems with benefit claims. Keep records and copies of all correspondence.

What if you are unhappy with your health care?

If you are in a managed care plan, you can change your primary care doctor if you are unhappy with the relationship. If the plan itself does not satisfy you, you may be able to switch plans. If you are dissatisfied with the managed care plan but prefer to remain in the plan because you want to remain with your physician, file a complaint. You have the right to a fair and timely process for resolving your complaint. If you are still unhappy, speak to your employee benefits manager to help you match your needs with the available plans.

Stay informed • Ask for a copy of the member handbook, sometimes called the evidence of insurance or evidence of coverage, to review coverage policies.

• Check to see if your plan has a right-to-privacy policy. Make sure that the plan requires your consent to release any medical information about you to outside agencies not involved with your direct health care or the administration of your health policy, especially your employer.

• Does your plan have a magazine or newsletter? Such a publication can give information on how the plan works and on rules that affect your care.

•

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• Talk to your plan administrator to learn more about your policy.

The more information you have, the easier it will be for you to make quality health-care decisions.

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Health Insurance and COBRA: Sometimes You Can Take It with You If you're like most Americans, you count on your employer for health insurance coverage. But what would happen to your health insurance if you suddenly stopped working or no longer qualified for benefits? No one can predict the future. It's possible that your company could lay you off or reduce your hours to part-time, your spouse could die, or your marriage could end in divorce. If something unexpected happened, you could be left without health benefits. And remember, buying private health insurance on your own can be pretty costly, especially if you're out of work.

Fortunately, there's the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). COBRA can prove to be a real lifesaver for you and your family when your health coverage is jeopardized. You may also benefit from the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which took some further steps toward health-care reform.

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) may help you continue your health insurance coverage for a time COBRA is a federal law designed to protect employees and their dependents from losing health insurance coverage as a result of job loss or divorce. If you and your dependents are covered by an employer-sponsored health insurance plan, a provision of COBRA entitles you to continue coverage when you'd normally lose it. Most larger employers (20+ employees) are required to offer COBRA coverage.

As an employee, you're entitled to COBRA coverage only if your employment has been terminated or if your hours have been reduced. However, your dependents may be eligible for COBRA benefits if they're no longer entitled to employer-sponsored benefits because of divorce, death, or certain other events.

Unfortunately, you can't continue your health insurance coverage forever. You can continue your health insurance for 18 months under COBRA if your employment has been terminated or if your work hours have been reduced. If you're entitled to COBRA coverage for other qualifying reasons, you can continue your coverage for 36 months. • Divorce: If your former spouse maintained family health coverage through work (and works for a company with at least 20 employees), you may continue this group coverage for up to 36 months after the divorce or legal separation. You'll have to pay for this coverage, though. Your cost of continuing coverage cannot exceed 102 percent of the employer's cost for the insurance. COBRA coverage will terminate sooner than 36 months if you remarry or obtain coverage under another group health plan. • Company goes out of business: Unfortunately, you may be out of luck here. If your company goes out of business and no longer has a group health insurance policy in force, then COBRA coverage will not be available. (A possible exception involves union employees covered by a collective bargaining agreement.)

Keep in mind that, whatever your circumstances, you'll have to pay the premium yourself for COBRA coverage--your employer is not required to pay any part of it. However, if you're eligible for COBRA coverage and don't have any other health insurance, you should probably accept it. Even though you'll pay a lot more for coverage than you did as an employee, it's probably less than you'll pay for individual coverage. You won't be subject to any health screenings, tests, or other pre-existing medical condition requirements when converting to a COBRA contract. Your COBRA benefits and coverage will be identical to those provided to similarly enrolled individuals.

The American Recovery and Reinvestment Act of 2009 provides that, for involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010, assistance-eligible individuals will only need to pay 35 percent of COBRA premiums for a period of up to nine months. The remaining 65 percent of COBRA premiums

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will be subsidized. However, this premium subsidy may need to be repaid in some cases.

The Health Insurance Portability and Accountability Act of 1996 expanded COBRA In 1996, HIPAA expanded certain COBRA provisions and created other health-care rights. In many ways, HIPAA took a significant step toward health-care reform in the United States. Some of its provisions may affect you. The major provisions of HIPAA: • Allow workers to move from one employer to another without fear of losing group health insurance • Require health insurance companies that serve small groups (2 to 50 employees) to accept every small employer that applies for coverage • Increase the tax deductibility of medical insurance premiums for the self-employed • Require health insurance plans to provide inpatient coverage for a mother and newborn infant for at least 48 hours after a normal birth or 96 hours after a cesarean section For example, assume you're pregnant and covered by a group health insurance plan at work. You decide to take a job at another firm. Under HIPAA, pregnancy cannot be considered a pre-existing condition for a woman who's changing jobs if she was previously covered by a group health insurance plan. So if you had insurance at your old job, you can't be denied health insurance coverage at your new job simply because you're pregnant.

However, many companies require you to be employed for 30 days or more before you become eligible for coverage. If you are nearing the end of your pregnancy, and that requirement poses a problem for you, you may be eligible for coverage under COBRA through your former employer.

The American Recovery and Reinvestment Act of 2009 provides Cobra subsidy ARRA provided a government subsidy of 65 percent of the cost of COBRA coverage for employees (and their eligible family members) who lost their health insurance coverage due to involuntary termination of employment in 2009. This subsidy was to last for up to nine months. The Department of Defense Appropriations Act, 2010 extends the subsidy to February 28, 2010.

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Vision Care Insurance One of the many things you can get insurance for is your eye care. Vision care insurance is relatively new and has become more common in recent years. Here's a crash course on the basics.

What is vision care insurance?

Vision care insurance is insurance that provides coverage for services relating to the care and treatment of the eyes. It typically covers services delivered by an optometrist or ophthalmologist. Depending on the specific plan, some or all of the following services may be covered: • Yearly eye exams • Glasses (with an annual limit) • Contact lenses and fitting (with an annual limit) • Glaucoma screening Some vision plans may provide more extensive coverage (e.g., certain eye surgeries), while others may limit coverage to "reasonable and customary" charges incurred during routine eye exams. Reasonable and customary charges generally don't include the cost of glasses and contact lenses. With some employer-sponsored vision plans, coverage may be even more narrowly limited to the medical treatment of certain eye conditions. This is rare, however.

How much does it cost?

Vision care insurance is generally available for a small, nominal annual premium, often as little as $50 a year.

What's more, your out-of-pocket cost may be even less if your employer pays all or part of the premium (as many employers do).

How does it work?

Vision care insurance may provide direct payment to the eye care provider for the services you receive. Or, you may be required to cover the charges out of pocket at the time of service and then file a claim for reimbursement.

It depends on the specific plan.

Where do you get it?

Almost everyone who has vision care insurance gets their coverage through work. Employer-sponsored vision care plans may be self-funded or self-administered plans. Vision care insurance may also be part of your employer's group health insurance plan, or one of several options you can choose under your employer's cafeteria benefit plan. Commonly, an employer will purchase a group vision care insurance plan through a health maintenance organization, insurance company, or other organization that offers such plans.

Individual vision care policies are not typically available because they're generally not cost effective from an insurer's standpoint. If you don't have access to vision care insurance through your employer, you may have a difficult time obtaining this kind of insurance through a private, stand-alone policy. Some individual health insurance policies may include vision care coverage, however, or allow you to add it for a slightly higher premium.

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Who should have it?

Anyone who has access to employer-sponsored vision care insurance should take advantage of it, because the benefits outweigh the minimal cost. If you don't have coverage and have no vision problems, you should probably just go without vision care insurance and "pay as you go" for annual eye exams. However, if your vision expenses are relatively high (e.g., glasses, contacts) and you don't have employer coverage, you may want to look into other ways of obtaining vision care insurance.

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Dental Insurance Tired of paying out of pocket every time you go to the dentist? Concerned about the health of your teeth down the road? Dental insurance may be the answer you're looking for.

What is dental insurance?

Dental insurance is insurance that provides coverage for services relating to the care and treatment of your teeth and gums. Typically, it provides coverage for some or all of the following dental services: • Diagnostic procedures • Semiannual checkups (including cleanings) and periodic X rays • Procedures that restore teeth • Oral and maxillofacial surgery (teeth extraction and oral surgery) • Periodontics (treatment of bone and gum diseases) • Prosthodontics (fillings, dentures, bridges, and crowns) • Orthodontics (repositioning of the teeth) • Oral surgery • Root canal therapy

What does it cost?

Dental insurance is typically inexpensive. The annual cost is often less than you spend eating at fast-food restaurants over the course of a year. If you have employer-sponsored dental insurance, the cost to you will be even less because your employer probably pays all or part of the premium.

How does it work?

Dental insurance may provide direct payment to the dentist for the dental care and treatment that you receive. Or, you may be required to cover your dental expenses out of pocket at the time of service and then file a claim for reimbursement. It depends on the specific plan. The dental plan may also have a list of preapproved dentists, like a health maintenance organization.

With group dental insurance, deductible and co-payment features usually come into play, though the deductible may not apply to routine cleaning and oral examinations. In addition, you may have to pay a separate coinsurance percentage for orthodontia and certain other procedures. Most plans also place a limit on the total amount of dental benefits that you can receive each year. Finally, if you've just enrolled in a dental plan, be aware that there may be a waiting period before your coverage kicks in.

Where do you get it?

Dental insurance has become more common in recent years. Of the roughly 55 percent of Americans who have dental insurance, most receive their coverage through their employer. Employer-sponsored dental insurance may take the form of a health insurance plan that includes dental coverage or a separate dental plan. It could also be benefit choices under a cafeteria plan. Health insurance plans are usually limited to routine cleaning and oral

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examinations. Separate dental plans usually cover additional dental procedures but place restrictions on amount and price of dental benefits for specific dental treatments.

Unfortunately, if you don't have access to employer-sponsored coverage, you will have a difficult time finding dental insurance. Despite the variety of dental plans available, plans for individuals are rare. Typically, an individual plan will not cover any orthodontia (braces). And dental coverage is seldom found in individual health insurance policies, except maybe coverage for accidental dental injuries.

This doesn't mean that you're out of luck if you're looking for individual coverage, but it does mean that your options may be limited. In fact, one of the few types of plans that's readily available to individuals is what's known as a dental discount plan, which isn't even a true insurance policy.

Who should have dental insurance and who shouldn't?

If your employer offers dental insurance, you should probably enroll in the plan because the benefits usually outweigh the cost to you. If coverage is not available through your employer, you should weigh your options carefully.

As mentioned, individual dental insurance is usually inexpensive but difficult to find. And there's no reason to throw even a little money away on insurance that you don't really need. Why pay monthly premiums, deductibles, co-payments, and so on if you have healthy teeth and rarely go to the dentist except for a yearly cleaning? If this is your situation, it's generally more cost effective to pay as you go for your dental expenses (referred to as self-insuring).

On the other hand, buying your own dental insurance might be a good idea if you've had a history of dental problems and expect to have more, if you smoke (which can cause yellowing and/or decay), or if you're over 40 (age-related decay). If any of these describes you, consider seeking out individual dental coverage.

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Mental Health Benefits When you think of health insurance, you probably think of coverage for prescription drugs, visits to the doctor, hospital stays, surgery expenses, and the like. But your overall health also includes your mental health, so don't overlook benefits that can help your outlook. Depending on the type of health insurance plan you have, coverage for mental health expenses may or may not be included. Review your policy with an eye for the following.

What are mental health expenses?

Depression, anxiety, and other mental disorders affect countless Americans. So do substance abuse problems.

Treatment for these problems may include consultations with doctors, private counseling, group therapy, prescription medications, hospital stays, outpatient programs, alternative living arrangements, and other expenses.

Read your health insurance policy to determine whether mental health benefits are provided Whether you have a private health insurance plan or participate in a group health plan at work, you'll need to read your policy carefully to find out what is and isn't covered. If your policy provides coverage for mental health care, consider the extent of that care.What types of benefits are provided? What do you have to do to get benefits, and how do you appeal decisions you don't agree with? There could be a different set of procedures for mental health care than for other forms of medical treatment in your plan. You should also pay close attention to treatments that are excluded from coverage and any limitations (e.g., hospitalization coverage for a maximum of 14 days).

Pay close attention to the types of mental health care providers and the approval process Find out which mental health professionals are covered by your plan. Are social workers, clinical psychologists, and psychiatrists included? What if you choose a licensed professional not covered by the plan? Some plans will deny coverage if you go outside their network of providers.

You should also determine who'll make the decision regarding the type of treatment you'll need. You may need to speak with your primary care physician (PCP) or call a toll-free number to explain your situation. Must you get approval before seeing a mental health specialist? Find out how long it takes to receive approval for treatments, and whether your mental health care provider will have to request approval for subsequent treatments.

Continuity and coordination of your behavioral health and medical care are important, so it is to your advantage to include your PCP in your treatment for mental health issues. If your policy does not use the same network of providers for mental health and medical care, make sure that your physicians share information in order to carefully monitor medication usage.

In addition, look to your policy to determine how your privacy will be protected. For example, if your medical information is transmitted, stored, or used for any purpose as data, will anything that identifies you be removed to protect your privacy? Will the information be transferred to others or sold? If your policy is unclear or fails to address important issues, ask your insurance agent.

Group health insurance plans and mental health Group health insurance plans are usually not required to include mental health coverage. However, some states do have laws that mandate this type of coverage. If your plan provides this type of coverage, federal law prevents the plan from placing annual or lifetime dollar limits on mental health benefits that are lower than the limits for medical and surgical benefits. For example, if your health plan has a $1 million lifetime limit on medical and

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surgical benefits, it cannot put a $100,000 lifetime limit on mental health benefits. (This law does not apply to individual health insurance plans or to groups with fewer than 50 employees.) Some states have their own additional requirements.

Group health plans may put other restrictions on mental health benefits and still comply with the law. For instance, mental health benefits can have higher co-payments or a lower number of allowed treatments, as compared to medical and surgical benefits.

What to do if you need help If you're concerned that you're suffering from a mental disorder, be aware that physical conditions may be causing your symptoms. Behavioral disorders can have a medical basis or implications for your physical health.

Your PCP can help determine if your symptoms are related to a medical cause. Medically related causes for mental or behavioral disorders will be covered under your medical care policy.

Follow your policy's guidelines to get help. If your policy does not cover mental health benefits, check with your state department of public health for any publicly funded programs where you may be able to receive services for substance abuse or mental health. Also, many employers provide on-site counseling or reimburse external agencies to provide the service for their employees under their employee assistance program.

Many states require insurance carriers to provide mental health benefits, so find out if your state mandates behavioral health and substance abuse benefits. Be sure to take notes and get the full names of anyone you speak to at your insurance company. If you don't follow the insurance company's rules, you could have to pay for the appointment yourself.

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Tax Planning Tips: Life Insurance Understanding the importance of life insurance is one thing. Understanding the tax rules is quite another. As insurance products have evolved and become more sophisticated, the line separating insurance vehicles from investment vehicles has grown blurry. To differentiate between the two, a mix of complex rules and exceptions now governs the taxation of insurance products. If you have neither the time nor the inclination to decipher the IRS regulations, here are some life insurance tax tips and background information to help you make sense of it all.

Life insurance contracts must meet IRS requirements For federal income tax purposes, an insurance contract cannot be considered a life insurance contract--and qualify for favorable tax treatment--unless it meets state law requirements and satisfies the IRS's statutory definitions of what is or is not a life insurance policy. The IRS considers the type of policy, date of issue, amount of the death benefit, and premiums paid. The IRS definitions are essentially tests to ensure that an insurance policy isn't really an investment vehicle. The insurance company must comply with these rules and enforce the provisions.

Keep in mind that you can't deduct your premiums on your federal income tax return Because life insurance is considered a personal expense, you can't deduct the premiums you pay for life insurance coverage.

Employer-paid life insurance may have a tax cost The premium cost for the first $50,000 of life insurance coverage provided under an employer-provided group term life insurance plan does not have to be reported as income and is not taxed to you. However, amounts in excess of $50,000 paid for by your employer will trigger a taxable income for the "economic value" of the coverage provided to you.

You should determine whether your premiums were paid with pre- or after-tax dollars The taxation of life insurance proceeds depends on several factors, including whether you paid your insurance premiums with pre- or after-tax dollars. If you buy a life insurance policy on your own or through your employer, your premiums are probably paid with after-tax dollars.

Different rules may apply if your company offers the option to purchase life insurance through a qualified retirement plan and you make pretax contributions. Although pretax contributions offer certain income tax advantages, one tradeoff is that you'll be required to pay a small tax on the economic value of the "pure life insurance" in the policy (i.e., the difference between the cash value and the death benefit) each year. Also, at death, the amount of the policy cash value that is paid as part of the death benefit is taxable income. These days, however, not many companies offer their employees the option to purchase life insurance through their qualified retirement plan.

Your life insurance beneficiary probably won't have to pay income tax on death benefit received Whoever receives the death benefit from your insurance policy usually does not have to pay federal or state income tax on those proceeds. So, if you die owning a life insurance policy with a $500,000 death benefit, your

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beneficiary under the policy will generally not have to pay income tax on the receipt of the $500,000. This is generally true regardless of whether you paid all of the premiums yourself, or whether your employer subsidized part or all of the premiums under a group term insurance plan.

Different income tax rules may apply if the death benefit is paid in installments instead of as a lump sum. The interest portion (if any) of each installment is generally treated as taxable to the beneficiary at ordinary income rates, while the principal portion is tax free.

In some cases, insurance proceeds may be included in your taxable estate If you hold any incidents of ownership in an insurance policy at the time of your death, the proceeds from that insurance policy will be included in your taxable estate. Incidents of ownership include the right to change the beneficiary, the right to take out policy loans, and the right to surrender the policy for cash. Furthermore, if you gift away an insurance policy within three years of your death, then the proceeds from that policy will be pulled back into your taxable estate. To avoid having the policy included in your taxable estate, someone other than you (e.g., a beneficiary or a trust) should be the owner.

Note: If the owner, the insured, and the beneficiary are three different people, the payment of death benefit proceeds from a life insurance policy to the beneficiary may result in an unintended taxable gift from the owner to the beneficiary.

If your policy has a cash value component, that part will accumulate tax deferred Unlike term life insurance policies, some life insurance policies (e.g., permanent life) have a cash value component. As the cash value grows, you may ultimately have more money in cash value than you paid in premiums. Generally, you are allowed to defer income taxes on those gains as long as you don't sell, withdraw from, or surrender the policy. If you do sell, surrender, or withdraw from the policy, the difference between what you get back and what you paid in is taxed as ordinary income.

You usually aren't taxed on dividends paid Some policies, known as participating policies, pay dividends. An insurance dividend is the amount of your premium that is paid back to you if your insurance company achieves lower mortality and expense costs than it expected. Dividends are paid out of the insurer's surplus earnings for the year. Regardless of whether you take them in cash, keep them on deposit with the insurer, or buy additional life insurance within the policy, they are considered a return of premiums. As long as you don't get back more than you paid in, you are merely recouping your costs, and no tax is due. However, if you leave these dividends on deposit with your insurance company and they earn interest, the interest you receive should be included as taxable interest income.

Watch out for cash withdrawals in excess of basis--they're taxable If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends or withdrawals you have previously taken. Any withdrawals in excess of your basis (gain) will be taxed as ordinary income. However, if the policy is classified as a modified endowment contract (MEC) (a situation that occurs when you put in more premiums than the threshold allows), then the gain must be withdrawn first and taxed.

Keep in mind that if you withdraw part of your cash value, the death benefit available to your survivors will be reduced.

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You probably won't have to pay taxes on loans taken against your policy If you take out a loan against the cash value of your insurance policy, the amount of the loan is not taxable (except in the case of an MEC). This result is the case even if the loan is larger than the amount of the premiums you have paid in. Such a loan is not taxed as long as the policy is in force.

If you take out a loan against your policy, the death benefit and cash value of the policy will be reduced.

You can't deduct interest you've paid on policy loans The interest you pay on any loans taken out against the cash value of your life insurance is not tax deductible.

Certain loans on business-owned policies are an exception to this rule.

The surrender of your policy may result in taxable gain If you surrender your cash value life insurance policy, any gain on the policy will be subject to federal (and possibly state) income tax. The gain on the surrender of a cash value policy is the difference between the gross cash value paid out (plus any loans outstanding) and your basis in the policy. Your basis is the total premiums that you paid in cash, minus any policy dividends and tax-free withdrawals that you made.

You may be able to exchange one policy for another without triggering tax liability The tax code allows you to exchange one life insurance policy for another (or a life insurance policy for an annuity) without triggering current tax liability. This is known as a Section 1035 exchange. However, you must follow the IRS's rules when making the exchange.

When in doubt, consult a professional The tax rules surrounding life insurance are obviously complex and are subject to change. For more information, contact a qualified insurance professional, attorney, or accountant.

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Tax Planning Tips: Disability Insurance The income you receive from disability income insurance may or may not be taxable. The taxability of disability income insurance benefits depends on what type of benefits you receive, whether the premiums were paid with pretax or after-tax dollars, and who paid the premiums (you or your employer).

Individual disability income insurance The rules surrounding taxation of individual disability income insurance benefits are generally simple. Because you pay the premiums with after-tax dollars, the benefits you receive are tax free. However, unlike health insurance premiums, you can't deduct premiums paid for individual disability income insurance as a medical expense.

Sometimes, your employer pays for an individual disability insurance policy on you. This may be the case if you are considered to be a key employee of the business. If so, different rules may apply. If the employer gets the benefit, then the premium is not deductible to the company, and the benefit is not taxable when received by the company.

Employer-sponsored group disability insurance If you are enrolled in a group disability insurance plan sponsored by your employer, the taxability of your benefits depends on who pays the premium. If you pay the total premium using after-tax income, then your benefits will be tax free. On the other hand, if your employer pays the total premium and does not include the cost of coverage in your gross income, then your benefits will be taxable.

If your employer pays part of the insurance premium and you pay the rest, then your tax liability will be split as well. The part of the benefit you receive that is related to the employer-paid share of the premium is taxable; any part of the benefit related to your share of the premium is tax free.

If you pay part of the premium for employer-sponsored disability coverage, the type of dollars you use to pay the premium determines whether your benefit will be taxable. If you pay your part of the premium with pretax dollars, through a cafeteria or medical reimbursement plan, you'll owe income tax on any disability benefit you receive that is related to that part of the premium. On the other hand, if you pay your part of the premium with after-tax dollars, you won't owe income tax on any disability benefit you receive that is related to that part of the premium.

Benefits under a cafeteria plan An employer-sponsored cafeteria plan allows you to select among certain employee benefits, including health, life, and disability insurance. You normally pay for these benefits on a pretax basis. Sometimes, however, your employer pays the premium for the benefits you choose (up to a certain amount), and if you choose additional benefits, you pay for extra coverage using either pretax or after-tax dollars.

If you pay your share of the premium with after-tax dollars, that portion of your disability benefits will be considered tax-free income; you'll be taxed only on the portion of the benefit related to your employer's contribution. However, if you pay your share with pretax dollars, that portion of your disability benefits will be considered taxable income, and you'll have to pay income tax on all of your benefit.

If you are totally and permanently disabled, and you receive fully or partially taxable disability benefits from an employer-sponsored disability insurance plan, you may be eligible to claim a tax credit when you file your annual income tax return.

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Group association disability insurance Disability policies purchased through an association are called group policies because members of the association are offered special terms, conditions, and rates based on the characteristics of that group.

Association policies function much like individual policies and have similar tax consequences. If you pay the premiums for an association policy, the benefits you receive are tax free, but you cannot deduct the cost of the premiums.

Government disability insurance All, part, or none of the disability benefits you receive through government disability insurance programs may be taxable. How much of the benefit is taxable (and under what circumstances) depends on the type of government disability benefit you are receiving: Social Security benefits: If the only income you had during the year was Social Security disability income, your benefit usually isn't taxable. However, if your total income exceeds a certain base amount and you earned other income during the year (or had substantial investment income), then you might have to pay tax on part of your benefit. More specifically, your Social Security benefit is taxable if your modified adjusted gross income plus one-half of your Social Security benefit exceeds the base amount for your filing status.

Medicare benefits: When you are disabled, you may be eligible to enroll in Medicare. If you pay premiums for the medical insurance portion of Medicare, you may deduct these premiums as a medical expense (provided, of course, that your medical expenses exceed 7.5 percent of your adjusted gross income). In addition, Medicare benefits you receive are not taxable.

Workers' compensation: Generally, if you receive a disability benefit from workers' compensation, that benefit won't be taxable. Any benefits paid to your survivors would also be tax exempt. However, in certain cases, you may be able to return to work and continue to receive payments. If this is the case, then your workers' compensation benefit would be taxable. Note, though, that if part of your workers' compensation benefit offsets (reduces) your Social Security benefit, then that part is considered to be a Social Security benefit. It may then be taxable according to the rules governing Social Security.

Veterans benefits: Disability benefits you receive from the Department of Veterans Affairs, formerly known as the Veterans Administration, are not taxable, except for certain payments for rehabilitative services.

Military benefits: Most military disability pensions are taxable. However, if you were disabled due to injury or illness resulting from active service in the armed forces of any country, your disability benefits may be tax free under certain conditions.

Federal employees retirement system (FERS) benefits: If you retire on disability, the payments under FERS that you receive from a pension or annuity are taxable as wages until you reach minimum retirement age. Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension.

Is it wiser to buy disability coverage with pretax or after-tax dollars?

If you pay for disability income insurance with pretax dollars, you are (in effect) reducing your taxable income.

This means that you won't have income taxes withheld on the portion of your income you used to pay your disability income insurance premium. However, you also have to consider how your benefit would be taxed if you ever begin receiving disability benefits. If you use pretax dollars to pay your insurance premium, then your benefit would be fully taxable. However, if you use after-tax dollars, your benefit won't be taxable.

It comes down to this: If you never use your disability benefits, you'll save money by paying your premiums with pretax dollars. But if you do use your disability benefits, using after-tax dollars to pay your premiums places you in a better position. Consult your tax professional for advice.

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Tax Tips: Health Insurance Your health insurance coverage probably came in handy several times over the past year. It all seemed so simple at the time--you paid a deductible, and your insurance usually kicked in the rest. But what do you do at tax time?

Just what are you taxed on, and what can you deduct on your federal income tax return?

Your income taxes may be affected by two aspects of your health insurance plan--the premiums and the benefits.

Here's what you need to know.

You don't include employer-paid premiums in your income For tax purposes, you can generally exclude from your income any health insurance premiums (including Medicare) paid by your employer. The premiums can be for insurance covering you, your spouse, and any dependents. It doesn't matter whether the premiums paid for an employer-sponsored group policy or an individual policy. You can even exclude premiums that your employer pays when you are laid off from your job.

What if your employer reimburses you for your premiums?

If you pay the premiums on your health insurance policy and receive a reimbursement from your employer for those premiums, the amount of the reimbursement is not taxable income. However, if your employer simply pays you a lump sum that may be used to pay health insurance premiums but is not required to be used for this purpose, that amount is taxable.

In most cases, you won't be able to deduct the premiums you pay The deductibility of health insurance premiums follows the rules for deducting medical expenses. Usually, the premiums you pay on an individual health insurance policy won't be deductible. However, if you itemize deductions on Schedule A, and your unreimbursed medical expenses exceed 7.5 percent of your adjusted gross income (AGI) in any tax year, you may be able to take a deduction. You can deduct the amount by which your unreimbursed medical expenses exceed this 7.5 percent threshold.

For example, if your AGI is $100,000, then 7.5 percent of your AGI is $7,500. If your unreimbursed medical expenses amount to $8,000 and you itemize deductions, you'll be able to deduct $500 worth of your expenses.

Unreimbursed medical expenses include premiums paid for major medical, hospital, surgical, and physician's expense insurance, and amounts paid out of your pocket for treatment not covered by your health insurance.

If you're self-employed, special deduction rules may apply In addition to the general rule of deducting premiums as medical expenses, self-employed individuals can deduct a percentage of their health insurance premiums as business expenses. These deductions aren't limited to amounts over 7.5 percent of AGI, as are medical expense deductions. They are limited, though, to amounts less than an individual's earned income. The definition of self-employed individuals includes sole proprietors, partners, and 2 percent S corporation shareholders.

If you qualify, you can deduct 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040; the portion of your health insurance premiums that is not deductible there can be added to your total medical expenses itemized in Schedule A.

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Your health insurance benefits typically aren't taxable Whether we're talking about an employer-sponsored group plan or a health insurance policy you bought on your own, you generally aren't taxed on the health insurance benefits you receive.

What about reimbursements for medical care? You can generally exclude from income reimbursements for hospital, surgical, or medical expenses that you receive from your employer's health insurance plan. These reimbursements can be for your own expenses or for those of your spouse or dependents. The exclusion applies regardless of whether your employer provides group or individual insurance, or serves as a self-insurer. The reimbursements can be for actual medical care or for insurance premiums on your own health insurance.

Note that there is no dollar limit on the amount of tax-free medical reimbursements you can receive in a year.

However, if your total reimbursements for the year exceed your actual expenses, and your employer pays for all or part of your health insurance premiums, you may have to include some of the excess in your income.

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What are the pros and cons of buying life insurance through my employer?

Question: What are the pros and cons of buying life insurance through my employer rather than buying my own policy?

Answer: Many companies offer their workers employer-sponsored life insurance coverage as part of their employee benefits package. If you are offered this opportunity, it is probably in your best interest to accept. Buying life insurance through your employer can be a relatively inexpensive and hassle-free way to get some of the life insurance coverage you need.

With a group life insurance plan, your employer purchases a single policy that covers all employees. This policy is subject to a single group premium payment. Some employers may pay the entire cost of the group policy (which is tax deductible to the employer). But if the plan requires you to pay a portion of the group premium, that amount will probably be lower than what you would pay for an individual insurance policy. And you generally don't need to pass a medical exam when applying for group life insurance.

The major disadvantage of employer-sponsored life insurance is that it isn't portable. If you leave your job, your group life insurance coverage will end, unless you're allowed to convert your group coverage to an individual policy (which may cost significantly more). This could leave you underprotected if you're unable to qualify for a new policy at a reasonable cost because of your age or changes in your health. And if you're required to pay the group premium out of your own pocket, you could decide not to participate in the group plan if you find a less expensive rate with an individual policy.

Another disadvantage to group life insurance is that the policy may not be tailored to your individual needs. For example, the amount of coverage may be less than what you require to be fully protected. If so, the group policy may give you the option of purchasing more coverage for an additional cost and for which you may be asked to answer medical questions. But even if you end up buying supplemental insurance through a separate company, your employer-sponsored plan gives you a head start in meeting your life insurance needs.

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Does a typical dental insurance policy cover braces?

Question: Does a typical dental insurance policy cover braces?

Answer: Some dental policies cover orthodontia (including braces) and others don't. You should carefully read through a dental insurance plan before selecting it if you think a member of your family may need orthodontic services.

If your dental policy covers orthodontia, there may be a waiting period before the coverage kicks in. Also, your policy may contain a maximum annual benefit limit for orthodontic work. And keep in mind that most plans offer orthodontic treatment to children only, not to adults. One more word of caution: If your child has a pre-existing dental condition, it may be excluded from coverage, depending on the policy provisions.

A dental plan's orthodontic benefits may be treated differently from other dental benefits. Normally, the plan will pay for a certain percentage of orthodontic treatment. The co-payments and deductibles may also differ from standard dental care. If you have any questions related to the orthodontia component of your dental insurance, contact your plan administrator or a customer service representative at your insurer.

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If my employer goes out of business and discontinues its health plan, am I still eligible for COBRA benefits?

Question: If my employer goes out of business and discontinues its health insurance plan, am I still eligible for COBRA benefits?

Answer: Probably not. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows individuals who lose their jobs to continue group health-care coverage under their employer's plans. However, if your company goes out of business and no longer maintains a group health insurance policy, then no COBRA coverage is available because there is no group plan to attach it to. (There's an exception if you're a union employee covered by a collective bargaining agreement, if the agreement provides for a medical plan.)

If you're not eligible for COBRA coverage, don't despair--you may still be able to obtain health insurance coverage. If you don't find a new job right away, you may be able to purchase low-cost or no-cost health insurance coverage through your state's unemployment office. When you do find a new job, your employer may provide health insurance. You may even be eligible for coverage through a family member's employer-sponsored health plan. Or, you might look into purchasing an individual health insurance plan.

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Is prescription drug coverage part of my medical coverage?

Question: Is prescription drug coverage part of my medical coverage?

Answer: You'll need to look at your health insurance policy--not all medical plans are alike. A comprehensive health insurance policy contains several types of coverage. If you have major medical insurance coverage as part of your health plan, prescription drug coverage may well be included.

Major medical coverage is designed to protect you against losses from catastrophic illness or injury.

Comprehensive major medical is especially broad and covers many additional expenses. Although coverage varies from one plan to another, most major medical policies include coverage for prescription drugs.

Read your policy carefully to see if prescription drugs are covered. Even if they are, be aware that out-of-pocket costs may apply. For example, many health plans require you to pay a co-payment (e.g., $10) every time you buy prescription medication. Typically, a higher co-payment is charged if you buy brand-name drugs, rather than generic drugs.

If your health plan provides inadequate prescription drug coverage (or none at all), you might explore ways to supplement your coverage. For example, you may be able to buy a separate prescription drug plan from an insurance company.

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I broke my leg and can't work. Am I entitled to file a disability claim with my employer?

Question: I broke my leg and can't work for two months. Am I entitled to file a disability claim with my employer?

Answer: Simply put, it depends. If your accident occurred at work or during a work-related activity (e.g., an off-site meeting), you may be eligible for workers' compensation, which is designed to protect employees who are injured on the job. If your injury occurred outside of work (e.g., a family ski trip), and you have disability benefits through an employer-sponsored disability plan, you may be able to file a disability claim with your employer.

Not sure? Talk to your manager or human resources representative. He or she can explain the types of disability benefits you're eligible for and help you fill out the paperwork.

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Can I see a specialist outside of my HMO provider network?

Question: Can I see a specialist outside of my HMO provider network?

Answer: You can see any doctor you want--if you're willing to pay for it. But if you want your health maintenance organization (HMO) to pay, you have to play by its rules. HMO guidelines require that you see your primary care physician (PCP) before going to a specialist. Your PCP will want to refer you to a doctor "in network." So, you'll need to explain to your PCP why you need to see the specialist you've selected. In most cases, your PCP should be willing to work with you. If not, consider switching PCPs (if your plan allows). Keep in mind that whether your PCP gives you the referral or not, your HMO can still deny the claim if you go to an out-of-network provider.

If your claim is denied, call the customer service number on the back of your insurance card and talk to the claim representative. He or she may be willing to make a one-time exception. If that doesn't work, you can file a formal appeal with the insurance company. You'll need to explain exactly why you needed to see that particular doctor and why no other doctor would do. Unfortunately, if your appeal is denied, you may just have to pay for the treatment yourself.

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What recourse do I have if my insurer will cover only a generic version of a prescribed drug?

Question: What recourse do I have if my insurer will cover only a generic version of a drug my doctor has prescribed?

Answer: To help ensure that you receive the brand-name version of the drugs prescribed to you, ask your physician to mark your prescriptions "DAW" (dispense as written). Your physician should do this anyway if a drug's generic equivalent is not appropriate for your condition. Otherwise, your pharmacist may be required to fill your prescription with a generic equivalent. But your insurer may not allow you to get brand-name drugs in every instance, depending on the terms of your health plan.

To deal with the rising cost of prescription medications, health insurers encourage providers to substitute many brand-name drugs with their generic equivalents. Although you may sometimes get the brand names by paying a higher co-payment, some health-care plans offer coverage only for generic drugs. If this is the case with your insurer, you may have to pay out of your own pocket if you want a brand-name drug. But speak with your primary care physician. If you have a condition that medically warrants the use of a brand-name medication that is not covered under your prescription plan, your doctor can petition your insurer for special coverage as a matter of medical necessity.

Remember that both brand-name and generic medications are approved by the U.S. Food and Drug Administration. In nearly all instances, the generic equivalent of a particular medication is an appropriate and less expensive substitute for the brand-name version.

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I'll be changing jobs, and I'm pregnant. Will I qualify for health insurance with my new employer?

Question: I'll be changing jobs next month, and I'm pregnant. Will I qualify for health insurance coverage with my new employer?

Answer: That depends on several factors. If your new employer offers a group health insurance plan, the federal Health Insurance Portability and Accountability Act (HIPAA) may apply. This act prevents your new group health plan from treating your pregnancy as a pre-existing condition if you were covered by group health insurance through your previous employer. But read your new policy carefully. Although most health plans cover maternity care and pregnancy, your new plan is not required to do so if it doesn't normally offer such coverage.

Unfortunately, you won't qualify for the protection offered by HIPAA if you had an individual (nongroup) health policy or if you had no health insurance at all. In either case, your pregnancy could be considered a pre-existing condition, and you may be subject to a waiting period under your new health plan.

Even if your new employer's group plan includes pregnancy and maternity care, you may be subject to such a waiting period before you become eligible for coverage. So, if you need prenatal care during this period, you may need to pay for the doctor's visits out of your own pocket. Remember that you may need more care near the end of your term. You may be able to continue health coverage through your previous employer under the Consolidated Omnibus Budget Reconciliation Act, but you'll have to pay the full premiums yourself.

Of course, your new company may not provide health insurance coverage. In this case, you can apply for an individual health insurance policy, but it will be difficult to find an insurer that will cover you at an affordable price due to your pregnancy. Therefore, before you take a new job, make sure that you understand the coverage and eligibility requirements of your new employer's health insurance plan. Plan carefully for the protection of your health and the health of your baby.

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Can I buy short-term disability coverage through my employer?

Question: Can I buy short-term disability coverage through my employer?

Answer: That depends on whether your employer offers it. Short-term disability coverage is an important benefit that increasing numbers of employers are providing. In some states, employers are even required to offer such coverage.

If your employer offers short-term disability coverage, you'll first want to find out if you're eligible to participate in the group plan. You may have to satisfy certain eligibility requirements, such as being employed full-time with the company for a specified number of days before you're eligible to enroll in the plan. Also, you'll want to know whether you will have to answer medical questions and meet underwriting standards to qualify. Ask your human resources manager.

Next, you'll want to find out how the disability insurance premiums are paid. Does your employer pay the premiums for you, or must you pay part of each premium through payroll deduction? This may affect your decision to buy, and it will also affect the federal income tax consequences if you ever receive disability benefits.

What if your employer doesn't offer short-term disability coverage? Unfortunately, you usually can't purchase an individual short-term policy. However, you may be able to buy it through an association or group that you belong to. Call and inquire. Long-term disability policies are available in the private insurance market, but they'll be much more costly.

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I'm looking for a job. How can I tell if an employer is offering a good insurance benefit package?

Question: I'm looking for a job. How can I tell if an employer is offering a good insurance benefit package?

Answer: Ultimately, an employer is offering a good insurance benefit package if it's one that appeals to you and meets your needs. But here are some specific things you might look for.

Perhaps the most important piece is the health insurance offered. You'll want coverage that adequately meets your medical needs. Hopefully, it will also allow you to continue seeing your current doctors and health-care providers. A complete package would offer dental, vision, and prescription drug coverage as well. And don't forget to find out how much you'll pay for health insurance--ideally, the employer will pay all or most of the premium cost for a single person.

Most large employers offer some group life insurance coverage. A basic package would provide term insurance coverage on your life in an amount at least equal to your annual salary. A more generous package would provide coverage for your spouse, domestic partner, or children, and would allow you to purchase low-cost supplemental life insurance.

If you get sick or injured and can't work, disability insurance replaces a portion of your income. Many employers offer short-term disability insurance that covers you for up to two years, but a good benefit package will also include long-term disability coverage. Again, the best package is one for which the employer pays all or most of the insurance premium.

Finally, a good benefit package might also offer you the chance to buy other types of coverage (e.g., long-term care or auto insurance) at group rates.

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Does my health insurance cover prescriptions filled by an on-line pharmacy?

Question: Does my health insurance cover prescriptions filled by an on-line pharmacy?

Answer: On-line pharmacies always offer privacy and sometimes save you money. They're open all night and spare you from driving through the snow to pick up your order. For these reasons, increasing numbers of Americans are using on-line pharmacies to fill prescriptions. But there's a hurdle to clear: Many on-line pharmacies aren't affiliated with the country's major health insurance providers, so your health plan won't pay for medication you buy on-line.

The problem, in many cases, is companies known as pharmacy benefits managers (PBMs). These companies coordinate the transactions between drug manufacturers, pharmacies, and health insurance providers. But that's not all they do; PBMs sell prescription drugs through the mail, and that makes them direct competitors of on-line pharmacies. Unwilling to give up any market advantage, PBMs have been reluctant to act as go-betweens for health insurance companies and on-line pharmacies.

So what's an on-line pharmacy to do? Some have gotten around this problem by stepping out of virtual reality to form affiliations with "brick-and-mortar" drugstores. These affiliations give the on-line pharmacies access to the insurance networks used by their real-world counterparts. So, if the drugstore on the concrete corner will accept your insurance company's payment, then its on-line counterpart down the cyberblock probably will as well.

If you're still having trouble locating an on-line pharmacy that will accept your health plan, here's an alternative, but check with your insurance provider first to make sure this will work. Once you've paid the on-line pharmacy to have your prescription filled, submit a claim to your insurance provider for reimbursement. Most insurance companies will allow this--you'll just need to complete a standard form and send it in along with the receipt for the transaction.

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If I leave my company, can I take my life insurance policy with me?

Question: If I leave my company, can I take my life insurance policy with me?

Answer: If you leave your company, you can often continue your life insurance coverage with the same insurance company. The group life insurance contract under which you are insured may have a conversion privilege available to all employees who are insured under the employer's group plan. A conversion privilege will be subject to certain conditions described in the master contract. Typically, these conversion rates are more expensive than an individual policy you could buy on your own if you are healthy.

You generally have 31 days from the day you leave your employer to submit an application. In most cases, you can apply for any kind of individual life insurance that the company offers. The insurance company generally will not include any supplemental coverages, such as disability insurance, that may have been included with your group life coverage.

If you decide to convert to a permanent life insurance policy, the premium will be based on your current age and the same amount of insurance that your group policy provides. The premiums must be based on standard or regular rates. No medical exam is generally required. This is especially important if you are not in good health when you leave employment.

Even if you don't take advantage of a conversion privilege when you leave your company, your group life coverage generally continues for 31 days after your last day of work.

Check with your human resources manager or financial advisor.

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What's the difference between an HMO and a PPO? Question: What's the difference between an HMO and a PPO?

Answer: A health maintenance organization (HMO) and a preferred provider organization (PPO) are both managed care plans. A managed care plan is a method of paying for and providing health care for a set fee using a network of hospitals, doctors, and other health-care professionals. The managed care plan monitors (and sometimes limits) the care that its doctors provide to members. Its goal is to ensure that unnecessary and expensive services to its members are minimized.

HMOs are the most popular form of managed care. Here, all health services and financing go through one organization. Services include inpatient and outpatient care and prescription drug benefits. The HMO offers a network of hospitals and health-care professionals that its members must use. These health-care professionals are either employed by or under contract to the HMO. Members pay a monthly fee that does not change (unless, for example, the entire fee structure changes annually) regardless of the care they may need.

PPOs are far less restrictive than HMOs. A PPO consists of a group of hospitals and health-care professionals who agree to provide care to members at a reduced cost. A PPO is designed to provide affordable health care while maintaining flexibility for its members, who do not have to use the services within the network but are encouraged to do so. Staying within the network means that their costs are lower. If members go outside the network, they are still covered but must pay a higher deductible and contribute a higher co-payment.

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If I leave my job, will I lose my employer-sponsored health insurance?

Question: If I leave my job, will I lose my employer-sponsored health insurance?

Answer: If you leave your job, voluntarily or otherwise, you may be able to continue your employer-sponsored health insurance under the federal Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. Eligibility does come with some restrictions, however.

Employers with 20 or more employees are required to offer continued health insurance for up to 18 months to employees who leave the company. The employer must make this offer in writing within 14 days of an employee's last working day. To qualify, you, the employee, must have been covered by the employer's health plan on the day before your employment status changed. There may also be state laws that affect your options.

You should be aware that you are responsible for paying the premiums for COBRA, and the coverage is usually expensive. Your employer may also charge a fee, up to 2 percent of the monthly premium, for administrative costs.

If COBRA is not applicable in your case, other options are available. For example, you may be able to convert your employer-sponsored health plan to an individual health plan. Although you may not have to pass a medical exam, a pre-existing condition could be excluded.

Another option is to purchase a short-term health policy that covers your health costs on a temporary basis, usually two to six months. Short-term policies are generally not expensive, but you will not be covered for any pre-existing conditions. Insurance companies provide this coverage at reduced administrative costs and then pass the savings on to their customers.

A fourth option is to continue your health coverage through a professional association that offers health insurance to its members at reduced rates. This is a particularly good option if you are self-employed.

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If I have long-term disability insurance coverage through my employer, do I need my own policy, too?

Question: If I have long-term disability insurance coverage through my employer, do I need my own policy, too?

Answer: First, how much disability insurance do you have through your employer, and what other financial resources do you have? Other resources might include your savings, property or assets you could sell, borrowed money, or your spouse's income. Now ask yourself if the combination of your employer-sponsored disability insurance and your other resources will be enough to pay your bills if you suddenly become disabled.

Unless you're independently wealthy, chances are good that your personal financial resources won't carry you through a long-term disability. Also, the money you've saved is probably earmarked for goals other than disability--your retirement or your children's education, for example. You might have to deplete these accounts to pay your bills.

Some employers do not offer long-term disability insurance. If your employer does, look closely at the policy.

Review the monthly benefit and the length of the waiting and benefit periods. Is the monthly payment enough to pay your bills? The typical group policy covers 60 percent of your income, up to a maximum amount. Is income defined as your base salary, or does it include commissions and overtime?

How long is the waiting period in your employer's disability policy? This is the length of time before any benefits are paid to you. Often, an employer's disability policy coordinates with the company's sick pay policy. You may have to use up all of your paid sick days before the disability policy begins to pay benefits. You need to plan on having cash available to cover any gaps in coverage.

If you decide to supplement your employer-sponsored policy with one of your own, make sure the two policies coordinate in ways that work for you. For example, if you need to increase the monthly benefit, be sure your own policy will pay concurrently with your employer-sponsored policy.

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Why do I need life insurance?

Question: Why do I need life insurance?

Answer: Life insurance has several purposes. Its most important function is to replace the earnings that would cease at the death of the insured. For businesses, life insurance is a way to protect key employees and the business itself.

A third purpose is to use life insurance to pay potential estate taxes.

If you die during your earning years, your family could suffer a severe economic loss as a result of losing your current and future income. Unfortunately, your family would still have to pay its regular bills, the mortgage, and outstanding debts, and perhaps even continue saving for college and retirement. Unless you're independently wealthy, achieving these goals may be virtually impossible for your family with the loss of your steady income.

Life insurance offers a way for your family to continue living comfortably and without worry.

Employers often purchase life insurance policies on key employees to insure against the loss of services or income that might result after an employee's death. Here, the proceeds from the policy are paid to the company.

Life insurance works for business partners too, where one business partner purchases a policy to insure against the financial loss that might result from the other partner's death or to buy out the partner's heirs.

Life insurance is also used to pay potential federal estate taxes. Since these taxes must be paid in cash, life insurance can be a good way to ensure the fulfillment of this obligation.

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Should my spouse and I integrate our health insurance benefits?

Question: Should my spouse and I integrate our health insurance benefits?

Answer: When you and your spouse are making this decision, it may be useful for you to focus on three key areas: (1) the out-of-pocket cost of each plan, (2) the levels of service and coverage offered, and (3) the coverage offered to any dependent children, if applicable.

Employers will sometimes pay some or all of their employees' health insurance premiums. If this is true in your case, there may be no reason to consider a change in your health insurance plans. If you pay the premiums yourself, however, compare the costs. Check into whether family coverage through one of the plans is less expensive than two single policies. If you have no children, two single policies are typically less expensive than one policy with family coverage. Many large group plans offer two-person coverage (an employee plus spouse, partner, or child) for less than the price of a family plan. However, insurance carriers will not allow you to bill two companies for the same medical service.

Other important cost factors to consider are out-of-pocket deductibles and co-payments. Even if the premium you pay at your company is lower than that paid by your spouse, you may discover that your deductibles and co-payments for health problems and routine doctor's visits are substantially higher. Despite the higher premiums, you may decide that it is better to join a family plan through your spouse's employer because of its lower deductibles and co-payments.

Be aware that the services and coverage that one plan provides, including the choice of doctors and hospitals, could outweigh the lower costs of the other. You might decide that your family is better off to pay higher premiums, deductibles, or co-payments while receiving specific services (such as rehabilitation, psychiatric therapy, or free eye exams) that the other plan does not offer.

See disclaimer on final page March 28, 2010