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Kinga Csepei

Cafeteria – the taxation of employer group insurance schemes is changing!

According to the Personal Income Tax Act, regarding taxable personal insurance schemes (including both risk or non-risk insurance schemes) that are starting in 2018 but continuing into 2019, it was possible for the employer to pay the premium more favourably than salaries. Regarding insurance years commencing in 2019, this favourable transitional rule can no longer be applied. Accordingly, companies must give due consideration to the conditions under which they can optimise these benefits.

In case of group insurance schemes, the favourable taxation rules also apply to employees added to the payroll in 2019 - but until no later than 31 December 2019. As a consequence of this transitional regulation, at the end of last year a lot of employers decided to keep these insurance schemes (that proved to be increasingly popular in recent years) among their fixed benefits. However, regarding insurance years commencing this year, this favourable transitional regulation can no longer be applied, so it is a worthy enough subject for companies to give consideration to available alternatives along which employees (and possibly also their family members) may be provided with insurance (albeit not free of tax) but under taxation rules that are significantly more favourable than the ones applicable to salaries.

In the life of companies this aforementioned benefit form appears primarily as service financing health insurance, and according to estimates may affect nearly 1.5 million employees and family members, not to mention that the deriving premium income represents a major source of income for insurance companies. 

The possible tax implications of group insurance schemes (until 31 December 2019)

Tax free benefit (regarding an insurance year starting in 2018 but until no later than 31 December 2019)

0 %

Certain specific benefit*



78.95 %

(*Can be applied to insurance years commencing in both 2018 and 2019 but under different conditions)

Rules applicable in the insurance year commencing in 2019

Unlike in previous insurance years, in the case of the insurance year of 2019 the premium paid for both individual and group insurance schemes by another person, is taxed (as a matter of principle) on the basis of the relationship (typically as salary income arising from employment) in place between the party bearing responsibility for the premium and the insured person, provided it is possible to identify the amount of per capita insurance premium without too much difficulty. 

In addition, however, some alternatives are still available to employees this year making it possible for them to provide their employees with such type of benefit for insurance years commencing in 2019 under taxation rules that are more favourable than those applying to salary.

How can we insure our employees from 2019 under taxation rules that are more favourable than those applying to salary?

In case of insurance schemes (these are the so called staff insurance schemes) where, despite conducting a good faith procedure, the paying agent is unable to identify insurance premiums applied to individual private persons, the full premium volume of the insurance, as total certain benefit is taxed using the tax burden imposed on the paying agent (38.35%). In total, this rate represents a tax burden about half of the tax burden imposed on salary (78.95%). 

In order for group insurance to fall in the taxation category mentioned in the second instance above (i.e to qualify as staff insurance),the scheme must meet specific terms and conditions and particular attention has to be paid to identifying the scope of beneficiaries.

All in all, it can be concluded that the transformation of specific group insurance schemes into staff insurance ones or their conclusion as staff insurance schemes in the first place may, in any case, represent a valid option for businesses, but particular attention should be paid to ensuring compliance with the principle of the proper exercise of law!

In addition to transformation into a staff insurance scheme, it may also be worth considering the financing by the employer of the service financing health insurance service (as a targeted service) that can be provided by the voluntary mutual health insurance fund. This is taxed as a certain specific benefit only on the side of the paying agent, so the tax burden is the same as the one imposed on staff insurance schemes. 

Is this cheaper for KIVA (small business tax) tax subjects? 

It is expected that for a number of reasons (due e.g. to the one percentage point decrease of the tax rate, the elimination of eva - the simplified entrepreneurial tax, the significant increase in the sales revenue limit necessary for eligibility, etc.),the number KIVA tax subjects is set to increase from 2020 onwards. Because of this trend we cannot leave it without mentioning that due to the lack of the liability to pay the social contribution tax, KIVA companies may include their employees in, among other schemes, group insurance schemes at costs that are lower than those incurred by companies paying taxes in the general manner.

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