Final answer:
Employers can deduct premiums for employee benefits, such as health insurance, retirement plans, Social Security, unemployment, worker's compensation insurance, and Medicare as ordinary business expenses. This lowers the employer's taxable income and provides benefits to employees. Charging an actuarially fair premium to the whole group rather than individually risks loss of customers due to perceived unfairness.
Step-by-step explanation:
Employers can deduct certain types of premium payments as an ordinary business expense from their taxable income. These premiums are typically tied to various employee benefits, including:
- Employee insurance, which mainly comprises health insurance coverage, is a deductible business expense for employers.
- Payments into retirement plans that benefit the employees can be deducted by the company.
- Employer payments to Social Security, which are mandatory contributions made by the employer on behalf of their employees.
- Unemployment and worker's compensation insurance that employers are legally required to provide.
- Other benefits such as Medicare contributions are also deductible expenses.
Employers cannot deduct insurance meant for the business itself (like property or liability insurance), but the premiums paid for employee benefits are considered part of the total compensation and can be deducted as a business expense. This is advantageous for both the employer and the employee as it lowers the taxable income for the employer while providing benefits to the employee.
If an insurance company were to charge an actuarially fair premium to the group as a whole rather than to each group separately, it runs the risk of losing customers who may find the premiums unfairly high. This is because such premiums do not take into account the varying risk levels of different sub-groups within the larger group, leading to some members possibly being charged more than their individual risk would warrant.