Life License Qualification Program (LLQP) Practice Exam

How is employee coverage paid for by the employer treated for tax purposes?

1. Taxable income to the employee

2. Tax-deductible to the employer as a business expenditure

3. Tax credits for contributions made by the employer

4. Benefits are taxable to the employee

The correct answer is: Tax-deductible to the employer as a business expenditure

When an employer pays for employee coverage, such as health insurance or other fringe benefits, those payments are generally considered a tax-deductible business expense for the employer. This means that the costs incurred by the employer for providing this coverage can be subtracted from their taxable income, ultimately reducing their overall tax liability. This tax treatment incentivizes employers to provide benefits to their employees, as it can help manage their tax exposure while enhancing employee satisfaction and retention. The deduction helps both parties: employers can lower their taxable income, while employees gain access to valuable coverage without incurring direct costs that could be taxable. Other options do not accurately reflect the treatment of employee coverage paid by the employer. For instance, benefits generally aren't considered taxable income for employees when they are provided as part of a group plan, so the suggestions that they would be taxable income or that the employee would receive tax credits for employer contributions are incorrect in the context of standard employee benefit plans.