Bad. A bad employee benefit is one that is nondeductible to the employer yet taxable to the employee, such as one that results in unreasonable compensation or is treated as a dividend.

Because it is nondeductible, on each $1.00 of income the employer must pay 34 cents in taxes. Since the remaining 66 cents is taxable to the employee, 17 cents of employee taxes will further reduce the original $1.00 to only 49 cents.

Better. A better employee benefit is one that is deductible to the employer, although still taxable to the employee.

Since there are no employer taxes, the full $1.00 is taxable income to the employee. Now 25 cents goes to pay employee taxes, and the remaining 75 cents actually benefits the employee.

Better benefits include salary allotment plans, executive equity plans, split-dollar insurance, survivor income plans, disability income plans, and deferred compensation.

Best. The best employee benefit is one that is deductible to the employer and either nontaxable or tax deferred to the employee.

Now the entire $1.00 benefits the employee, without any current reduction for either employer or employee taxes.

"Best" benefits include group term insurance, medical expense reimbursement plans, SIMPLE IRAs, and qualified retirement plans, including 401(k) plans. (Specific benefits may not be available to all employees and employers. Although SIMPLE IRAs and qualified retirement plans, including 401(k) plans, are listed among the "best," it must be recognized that the employee pays taxes when retirement income is actually received. Tax-free group term insurance is limited to $50,000 of coverage. The term leveraged benefit can be used to describe some of the best employee benefits.)