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Employee Benefits
Tuesday, March 3, 2015 - 03:16
Hidden benefits

The change around employer-provided disability income benefits become effective on 1st March 2015.

Many employers have their own group policies to provide disability income benefits to their employees. The company usually pays the premium for this benefit. Up to 28th February 2015, the employee will pay tax on the premium, which he can claim back at the end of the tax year. The employee’s tax position for the premium is consequently neutral. If the employee becomes disabled and receives a benefit, that benefit is taxed. The employer gets a deduction for the premiums paid on behalf of the employee.
“From 1st March, however, the employee will no longer be able to claim a tax deduction on the premium paid for a disability income benefit,” explains Hettie Joubert - Legal Adviser at Momentum Employee Benefits. “For employees whose salaries are under the tax threshold, currently R70 700, there will be no change. Employees earning more than the tax threshold may see an impact on their take home pay. We need to remember that at the same time as this change happens the tax tables also adjust to avoid bracket creep. This means that a portion of the reduction in take home pay is absorbed by the higher tax margins. For most of the taxpaying employees, the impact should be negligible.”
If the employee becomes disabled and receives the benefit, that benefit will be tax free. This means that they will get a higher disability income benefit, which will somewhat decrease their insurance gap. This is the gap between what the employee should have as an insurance benefit and what he actually has. As it is, most South Africans are under-insured. It will not be prudent to adjust their cover downwards.
The examples in the table show the impact of the new rules.

“The employer’s position remains the same. It will still get a deduction for the premiums paid on behalf of its employees.”
She says employees who will be receiving a disability income benefit on 1st March 2015 and who would have been paying tax on those benefits up to that date will see an immediate increase in their benefits. They will have the best of both worlds, as they will have been entitled to a deduction on the tax on their premiums before 1st March 2015, and will also pay no tax on their benefits after 1st March 2015.
So what is the impact of this change on the employer? Firstly, it is expected that the incidence of disability income benefit claims will rise. If the disability benefits are not going to be taxed any more, employees might be more likely to claim this benefit than they are now. Secondly, employees who are receiving a disability income benefit might be more reluctant to return to work because of the higher benefit. “This is where the employer comes in,” notes Joubert. “What measures are you as an employer going to put in place to make sure this doesn’t happen? A suggestion is that you liaise with the insurer who issued the disability income benefits policy to come up with a plan to manage this.”

Copyright © Insurance Times and Investments® Vol:28.3 1st March, 2015
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