Massachusetts Life Producer Practice Exam

When an employer pays for accidental death and dismemberment insurance for employees, how is this treated for tax purposes?

1. Taxable income for employees

2. Tax deductible to the business

3. Non-deductible business expense

4. Tax exempt under state law

The correct answer is: Tax deductible to the business

When an employer pays for accidental death and dismemberment insurance (AD&D) for their employees, this expense is considered tax deductible for the business. As a general principle, businesses are allowed to deduct ordinary and necessary expenses incurred in the course of their operations, and providing employee benefits such as insurance falls under this category. This tax deduction serves as an incentive for employers to offer such benefits, as it reduces their overall taxable income, making it a beneficial strategy for both the employer and employees. Furthermore, it aligns with the broader tax treatment of employer-provided insurance benefits, where employers often receive deductions to encourage the provision of various forms of employee coverage. This information highlights the importance of understanding how different employee benefits impact business taxes, which can be a significant factor in overall compensation strategies.