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How to treat employees’ personal insurance policies in payroll

In a recent seminar at CRS Technologies, presenter Sonika van Wyk: legislation business consultant at the company, said that the manner in which payroll administrators have to account for employees' personal insurance policies, such as income protection and key person policies, has changed, thanks to the budget 2014. "It used to work one of two ways," she said. "The employee would only be taxed when the proceeds were paid out or the employee would be taxed earlier and not when the proceeds were paid out."

Van Wyk indicated that now, for income protection policies, the South African Revenue Service (Sars) has streamlined this process for payroll practitioners. According to the new method, everything will be included into an employee's taxable earnings and the paid-out proceeds won't be taxable.

What are key person policies?

A 'key person policy' is taken out by a company to insure one of its directors or valuable employees against, for example, unexpected death.

Example

Joe is the director of a multi-million rand mining company and has a significant amount of shares in the business. His employers take out a key person policy on him so that in the event of his untimely death, the company will be able to buy back his shares.

The structure of the key person insurance:
The business will take out a life insurance policy, possibly with disability and/or dread disease cover, on the life of the key person. The proceeds of this policy will be paid to the business which will then use them as it sees fit. If the business has a board, it should conclude a board resolution indicating the reason for the life insurance policy and confirming the decision to put the cover in place.

Source: Liberty

"In the past, there have been circumstances where the company will (fraudulently) get the employee to pay the key person policy premiums," said Van Wyk.

"Now," she says, "it's been reiterated that as a key person policy is taken out for the benefit of the company the premiums must be paid by the organisation itself. These policies are for the company to insure themselves should a key person in the company pass away," concludes Van Wyk.


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