When a company pays insurance premiums for its directors or employees, the tax treatment depends on the type of policy, the beneficiary, whether the insured person is entitled to receive the payout and whether the policy has an investment or surrender value.
The company must consider three separate tax questions:
- Is the insurance premium deductible for corporate income tax?
- Is the premium a taxable benefit in the hands of the director or employee?
- Can the company claim the GST charged on the premium?
This guide explains the treatment based on current Inland Revenue Authority of Singapore (IRAS) guidelines.
General Tax Treatment of Staff Insurance Premiums
Insurance premiums paid for employees are generally deductible as staff costs when they are incurred for the company’s business.
However, deductibility does not automatically mean that the premium is tax-free for the employee. If the employee or director receives insurance protection as an employment benefit, the premium may need to be reported as a taxable benefit-in-kind.
The policyholder, beneficiary, payout arrangement and terms of the employment contract must therefore be reviewed before deciding the tax treatment.
Summary of the Tax Treatment
| Type of insurance | Corporate tax treatment | Taxable to director or employee? |
|---|---|---|
| Group medical insurance available to all staff | Deductible, subject to the medical expense cap | Generally not taxable |
| Individual medical or life insurance benefiting a director or employee | Generally deductible as staff cost, subject to applicable restrictions | Generally taxable |
| Group life, personal accident or critical illness insurance where employees are contractually entitled to the payout | Generally deductible as staff cost | Premium attributable to the employee is generally taxable |
| Group insurance where the employer is not contractually required to pass the payout to employees | Generally deductible as staff cost | Premium is generally not taxable |
| Business travel insurance | Generally deductible | Not taxable |
| Work injury compensation insurance | Deductible | Not taxable |
| Keyman insurance covering loss of company profits | Generally deductible if revenue in nature | No personal benefit if the company is the beneficiary |
| Insurance with investment or cash surrender value | Generally capital and non-deductible | Depends on who receives the benefit |
| Personal insurance of a shareholder-director with no genuine employment or business purpose | May be non-deductible | May be taxable as a benefit or other payment |
Group Medical Insurance
Premiums for group medical insurance may qualify as deductible medical expenses for the company.
Under an IRAS administrative concession, the premium is generally not taxable in the hands of employees where:
- The insurance is provided in place of medical costs that the employer would otherwise reimburse; and
- The benefit is available to all staff.
The “available to all staff” condition is important. A medical policy provided only to selected directors or shareholders may not qualify for this concession unless there is a proper employment basis and the arrangement can be commercially justified.
IRAS explains the employee-level treatment in its guidance on insurance premiums paid by employers.
Corporate Tax Deduction Cap for Medical Insurance
Medical and dental insurance premiums are included within the company’s medical expense deduction limit.
The general deduction cap is:
- 1% of total employee remuneration; or
- 2% of total employee remuneration if the company implements qualifying portable medical benefits arrangements or meets the relevant conditions.
Total employee remuneration generally includes:
- Employees’ salaries;
- Allowances and bonuses;
- Employer CPF contributions;
- Directors’ executive remuneration; and
- Mandatory overseas pension or provident fund contributions.
However, directors’ fees are excluded when calculating total employee remuneration for the medical expense cap.
This distinction is important where a company has directors but few or no employees. A company cannot use directors’ fees to increase the medical expense deduction limit, although executive remuneration paid to a working director may be included.
Further details are available in the IRAS guidance on the tax deduction for medical expenses.
Individual Insurance Policies for Directors or Employees
If a company pays the premium for an individual life, medical, accident or critical illness policy and the director or employee is the beneficiary, the insurance protection is generally a taxable employment benefit.
The premium paid by the company should generally be:
- Included in the employee’s taxable income;
- Reported in the employee’s Form IR8A, where applicable; and
- Treated as staff cost by the company, subject to the normal deduction rules.
For example, if a company pays an annual personal life insurance premium of S$5,000 for its managing director and the director’s family is entitled to the payout, the S$5,000 would generally constitute a taxable benefit provided to the director.
The position is particularly sensitive where the insured person is also a shareholder. The company should be able to demonstrate that the premium forms part of a genuine employment remuneration package rather than a private or shareholder expense.
Group Life, Personal Accident or Critical Illness Insurance
The treatment of a group insurance policy depends largely on whether the employee is entitled to the insurance payout.
Employee Is Entitled to the Payout
The employee is treated as receiving an insurance benefit if:
- The employee is the named beneficiary;
- The employee’s nominated beneficiary or next-of-kin is entitled to the payout; or
- The employer is contractually required to pass the payout to the employee or the employee’s beneficiaries.
The contractual obligation may appear in:
- The employment contract;
- The staff handbook;
- The company’s human resources policy;
- A collective agreement; or
- The insurance policy itself.
In these circumstances, the portion of the premium attributable to the employee is generally taxable as an employment benefit.
Employer Has Discretion Over the Payout
The premium is generally not taxable to the employee where:
- The employer is the policyholder and beneficiary;
- The employee is not the named beneficiary; and
- The employer has no contractual obligation to pass the payout to the employee, family or next-of-kin.
In this case, the employee has not received an enforceable insurance benefit.
However, if the employer later chooses to give the insurance proceeds to the employee, the payment may be taxable as additional remuneration. An exemption may apply if it is a death gratuity or compensation for death or bodily injury.
Administrative Concession for Group Insurance
For group insurance other than group medical insurance, an employer may elect not to claim a corporate tax deduction for the premiums. If the applicable conditions are satisfied, the premiums will not be taxed in the hands of the employees.
Under this concession:
- No advance approval from IRAS is required;
- The company must forgo the corporate tax deduction;
- The treatment must be applied consistently to all employees covered by the same group policy; and
- The company cannot claim a deduction for some employees while excluding the premiums from the taxable income of other employees under the same policy.
The concession is generally not available to:
- Investment holding companies;
- Tax-exempt bodies; or
- Service companies assessed under the cost-plus mark-up basis.
These entities should review whether the premium attributable to each employee or director must be reported as a taxable benefit.
Reporting Insurance Premiums in Form IR8A
Where the premium is taxable, the employer must determine the amount attributable to each insured employee or director.
IRAS accepts a reasonable and consistent allocation method, such as:
- Dividing the total premium by the number of employees covered;
- Using the actual premium charged for each employee;
- Allocating the premium according to each person’s level of coverage; or
- Prorating the amount according to the employee’s length of service during the year.
For example, if a company pays a group insurance premium of S$12,000 covering 40 employees for the entire year, it may attribute S$300 to each employee, provided this method reasonably reflects the insurance arrangement.
The company should retain the allocation calculation, insurance schedule and supporting policy documents.
Insurance for Company Directors
For benefit-in-kind purposes, company directors may be treated as employees. Insurance protection provided to a director can therefore be taxable even if the director does not receive a monthly salary.
The following should be reviewed:
- Is the director an executive or non-executive director?
- Does the director have an employment contract?
- Is the insurance part of the director’s remuneration package?
- Is the director or the company the beneficiary?
- Is the director also a shareholder?
- Is the company contractually required to pass the payout to the director?
- Does the insurance cover a genuine business risk?
- Does the policy have a cash surrender or investment value?
A policy obtained principally for a shareholder-director’s private or family protection may be challenged as a personal expense, especially where it is unrelated to the person’s employment duties.
Keyman Insurance
Keyman insurance protects a business against financial loss arising from the death, disability or incapacity of an important director or employee.
The premium is generally deductible where:
- The policy is intended to compensate the company for a loss of trading profits;
- The company is the policyholder and beneficiary;
- The policy does not provide an investment or savings benefit; and
- The insurance is revenue rather than capital in nature.
If the policy compensates the company for lost profits, the insurance proceeds are generally taxable as a revenue receipt.
In contrast, the premium may be non-deductible where the policy:
- Is connected to the acquisition of a capital asset;
- Protects a company loan or another capital exposure;
- Has a cash surrender or investment value; or
- Is intended to fund the purchase of a shareholder’s shares.
The name “keyman insurance” is not conclusive. IRAS will consider the purpose and terms of the policy.
Policies With Cash Surrender or Investment Value
Insurance premiums are generally non-deductible when the policy provides:
- A cash surrender value;
- An investment component;
- A savings component;
- An endowment benefit; or
- Another capital asset belonging to the company.
Such expenditure is capital in nature because the company is acquiring or building up an asset rather than merely paying for insurance protection.
The accounting treatment does not determine the tax outcome. Even if the premium is recorded as an expense in the financial statements, a tax adjustment may be required in the corporate tax computation.
Business Travel Insurance
Travel insurance covering an employee or director during an overseas business trip is generally:
- Deductible to the company; and
- Not taxable to the employee or director.
The company should retain documents showing the business purpose and travel period.
Insurance covering private holidays or an extended private portion of a trip may need to be apportioned or treated as a taxable personal benefit.
Work Injury Compensation Insurance
Premiums for compulsory work injury compensation insurance are generally deductible because they are incurred in connection with the employer’s statutory liability.
The insurance protection is not treated as a taxable benefit for the employee.
Tax Treatment of Insurance Payouts
The tax treatment of an insurance payout depends on whether the receipt is capital or revenue in nature.
Payout Received by the Company
A payout received by the company is generally:
- Taxable where it compensates the company for loss of profits or another revenue item; or
- Non-taxable where it represents the realisation of a capital asset or compensation for a capital loss.
Payout Received by an Employee or Director
A payout received by an employee as the intended beneficiary of a life or accident policy is generally capital in nature and is normally not taxable.
However, if the employer was not contractually required to pass the payout to the employee but voluntarily does so, the amount may be treated as additional remuneration.
Death gratuities and consolidated compensation for death or bodily injury may qualify for exemption under the Income Tax Act.
GST Treatment of Staff Insurance Premiums
Corporate income tax deductibility and GST input tax recovery are separate matters.
GST incurred on medical and accident insurance premiums for staff is generally not claimable under Regulation 26 of the GST (General) Regulations.
An exception may apply where the insurance or payment of compensation is obligatory under:
- The Work Injury Compensation Act; or
- A qualifying collective agreement under the Industrial Relations Act.
Therefore, a premium may be deductible for corporate income tax while the GST charged on the same premium remains blocked.
Refer to the IRAS guidance on conditions for claiming input tax.
Documents Companies Should Keep
Companies should retain the following records for at least five years:
- Complete insurance policy;
- Policy schedule;
- Premium invoice and payment evidence;
- Name of the policyholder;
- Details of the insured persons;
- Name of the beneficiary;
- Description of the payout arrangement;
- Employment contracts and staff handbook;
- Board approval, where applicable;
- Explanation of the policy’s business purpose;
- Premium allocation for each employee;
- Form IR8A reporting records;
- Medical expense cap computation; and
- Corporate tax adjustments for non-deductible premiums.
The company should not rely only on the insurance policy’s title. The rights of the parties and the commercial purpose of the arrangement determine the correct tax treatment.
Common Tax Mistakes
Common mistakes include:
- Claiming all insurance premiums without checking for an investment or surrender value;
- Assuming that every group policy is tax-free for employees;
- Failing to report premiums benefiting directors in Form IR8A;
- Treating a shareholder’s private insurance as a business expense;
- Using directors’ fees when calculating the medical expense deduction cap;
- Claiming GST on staff medical or accident insurance without checking Regulation 26;
- Failing to distinguish between the policyholder and beneficiary;
- Applying the group insurance concession inconsistently; and
- Treating insurance payouts as automatically non-taxable.
How Ascend Can Assist
Ascend Corporate Service Pte. Ltd. can assist companies with:
- Reviewing director and employee insurance policies;
- Determining corporate tax deductibility;
- Assessing whether premiums are taxable benefits;
- Preparing Form IR8A benefit calculations;
- Computing the medical expense deduction cap;
- Reviewing GST input tax treatment;
- Preparing corporate tax adjustments; and
- Maintaining supporting tax documentation.
Conclusion
The tax treatment of director and staff insurance depends mainly on four questions:
- Who is the policyholder?
- Who is entitled to the payout?
- Does the policy protect the business or provide a personal benefit?
- Does the policy contain an investment or cash surrender value?
Companies should review the actual policy and contractual arrangements before claiming a tax deduction or preparing employees’ income information.
This article is for general information only and does not constitute tax, legal or insurance advice. The appropriate treatment depends on the policy terms, employment arrangements and facts of each case.
