Employer insurance could breach concessional caps

Employer insurance arrangements may cause superannuation concessional caps to be breached after the maximum concessional cap is reduced to $25,000 on 1 July, according to Rice Warner.

In an analysis, the research house found generous contribution levels, above minimum super guarantee retirements, and/or generous employer-funded insurance benefits provided to employees within a super fund from some employers may be causing caps to be breached.

“Insurance benefits are concessionally taxed as superannuation benefits.  Some employers choose to provide benefits via a superannuation fund for ease of administration,” the analysis said.

“However, because the premiums are treated as employer superannuation contributions they count towards an employee’s concessional contribution cap of $25,000 per annum.”

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Rice Warner said for many employees, insurance premiums would be low and the individual would not be aiming to maximise their concessional contributions. However, it could be a very different situation for those nearing retirement age and aiming to salary sacrifice additional contributions.

“The concessional cap can be breached even if the employee makes no salary sacrifice contributions to superannuation. The situation can be even worse for the older employees, especially those with IP cover, as insurance premium rates increase significantly above age 50,” Rice Warner said.

“For these more highly paid employees, the additional 15 per cent tax on superannuation contributions for those with adjusted taxable incomes (for many people salary plus employer superannuation contribution plus any fringe benefits) over $250,000 must also be taken into account.”

Rice Warner noted that even if concessional caps were breached, the employer could continue to pay for cover, with the excess above the cap being taxed at maximum marginal rates and then treated as non-concessional contributions.

“Importantly, ensure that benefits and possible implications for employees are being communicated adequately, encouraging employees to consult a financial adviser who can take account of their total financial position and explain it to them,” it said.