Types of benefits your employer may offer
Employers typically offer you life and disability benefits obtained at favourable group rates in order to sweeten your employment contract.
These benefits may be structured in a number of ways, and your employer may offer a variety of structures without you, as an employee, being aware of this, Hugh Hacking, the head of retirement fund solutions at Old Mutual Corporate, says.
Hacking says employers who contribute to an umbrella retirement fund (a fund in which multiple employers participate) likewise use a variety of group life structures:
Approved scheme: group life, lump-sum disability and/or funeral cover within your retirement fund You and your employer contribute to the fund. The fund may use a portion of the contributions to pay premiums for group life cover, lump-sum disability and funeral cover for the members of the fund.
These are known as “approved” group risk benefit schemes.
If you die or are disabled before retirement, the fund will receive the policy proceeds. In the case of disability, the disability benefit is paid to you. In the case of death, the proceeds and the fund credit are paid to your dependants, as decided by the trustees of the fund.
Lump sums paid to you from the fund are taxed in your hands according to the retirement fund lump-sum tax table. This provides for a once-off tax-free amount of R315 000 on retirement or death; thereafter, set tax rates apply, which depend on the amounts received.
Unapproved scheme: group life, disability, income protection and/or funeral cover directly from an insurer, paid for by your employer Your employer may pay premiums directly to an insurer for lump-sum disability cover and/or income protection cover for its employees, group life cover and/or funeral cover for its employees’ families.
These policies are known as “unapproved” group risk benefit schemes.
Income protection policies are designed to pay you a monthly income to replace the income you lose on becoming disabled and unable to work. Income protection policies differ from lump-sum disability policies that pay you a lump sum should you become disabled.
If you are disabled before retirement, your employer may receive the policy proceeds and pay them over to you. If you have nominated your beneficiaries to receive the benefits on your death and you die before retirement, the benefits may then be paid directly to your beneficiaries.
Your employer may pay the premiums on your behalf as a benefit on top of your salary or simply offer you the opportunity to participate in such a group scheme but expect you to pay the premiums from your aftertax salary, in which case the premiums will reduce your salary.
Where you have paid the premiums from your after-tax salary, the proceeds of the policies will generally be paid to you tax-free. The exception is premiums paid for an income protection policy, because you enjoy a tax deduction for these premiums. Therefore, the monthly income paid to you will be taxable.
Where your employer pays the premiums as an additional benefit for you, you may be liable for a taxable fringe benefit. If the policy is not an income protection one, when the lump-sum proceeds are paid to you, these will generally be tax-free.
However, if the policy pays out to your employer and your employer uses the proceeds, for example, to pay you a salary when you become disabled, the salary paid will be taxed.