SMSF members paying insurance premiums for cover through their fund should be aware some benefits may remain trapped in the fund, especially where the policies are older and remain grandfathered into the fund, an SMSF technical expert has warned.
Heffron senior SMSF technical specialist Annie Dawson said the benefits from a temporary incapacity insurance policy have restrictions around how they can be accessed that stem from the source of the benefits.
“Access to these benefits is quite restrictive and there are a lot of details around it, but it has to be a non-commutable income stream that is paid at least monthly and will only replace the gain or reward received from gainful employment before an injury,” Dawson said during the recent Heffron Super Intensive Day.
“There are also restrictions about how much can be paid and while there can be variations, they cannot be more than 5 per cent of CPI (consumer price index) per annum.”
She highlighted trapped benefits also resulted from policies that may have been written prior to 1 July 2014 and still remain inside SMSFs and offer additional benefits.
“What I’m talking about is clients that have income protection that has bells and whistles. An example we saw recently was a fund receiving a homecare benefit that it couldn’t pay through to the member,” she said.
“The fund received it as the policy owner and it got allocated to the member’s account because that’s where the premiums were deducted from, but it couldn’t be paid through to them.
“Also watch out for income protection policies that have an agreed value which locked in a value for the income that member was receiving at some point over the life of the policy.
“When they claim on the policy if the member is not working in the same capacity anymore and their wages are lower, and remember for super all we can do is replace their pre-injury income, where the policy benefit might be higher is another example of where the benefits are trapped in super.”
She added the restrictions extended to where a member could draw benefits from as some superannuation contributions would remain trapped in the fund.
“The types of contributions that will create trapped benefits is quite long and includes spouse and member contributions, superannuation guarantee and award contributions, mandated contributions, as well as any rollovers in and earnings on all of those,” she said.
“I can use employer salary sacrifice contributions and pay those through along with earnings on those, as well as income protection or salary continuance benefits, but the rest of the stuff is trapped, so if a member qualifies as being temporarily incapacitated, you will need to work out what you can actually pay through.”