AD Banker Comprehensive Practice Exam

How are employer paid premiums on a group life insurance plan treated for tax purposes?

1. As compensation in lieu of cash

2. As an ordinary and necessary business expense

3. As a personal expense paid on behalf of the employee

4. A barter transaction

The correct answer is: As an ordinary and necessary business expense

Employer paid premiums on a group life insurance plan are treated as an ordinary and necessary business expense for tax purposes. This classification highlights the nature of the expense in the context of running a business. When an employer pays premiums for group life insurance, it is generally considered a part of employee benefits, which are intended to attract and retain employees. Since these expenses directly relate to the operation of the business and are necessary for maintaining a competitive workforce, they qualify as ordinary and necessary business expenses. This allows the employer to deduct the cost of the premiums from their taxable income, which can provide a tax benefit. Other options would not accurately describe the treatment of these premiums. For instance, considering premiums as compensation in lieu of cash could mischaracterize the intent of life insurance benefits. Identifying these premiums as a personal expense obscures their business purpose, and labeling them as a barter transaction does not apply since there is no exchange of goods or services involved in simply providing insurance benefits.