At an engineering firm with fifty employees, the owner would like to retain three key people for the long term but does not want to raise their pay again, because the market will outbid it within six months. The HR manager has heard that there is such a thing as a “loyalty programme with insurance”: the company pays into a savings-type group insurance whose accumulated value becomes the employee's only years later, if they stay with the company. The question they came to me with: how exactly does this work, and is it true that it is taxed differently from ordinary group accident and health insurance? As a broker, I see that benefits planning typically stops at the risk package, although the savings element is a tool with a different logic – with different strengths, different taxation and different pitfalls. This article describes the HR tool neutrally and leaves the figures to the tax advisor.
- Risk-only group insurance pays out on an insured event, whereas the savings (capital-accumulation) element builds up capital in the employee's name, to which the company can attach a loyalty period and conditions.
- Under Section 3, point 89 of the Personal Income Tax Act (Szja tv.), the premium for the savings element is a taxable insurance premium, and since the portion attributable to the insured person can be determined from the structure itself, it is the employee's income according to their legal relationship – wage income in an employment relationship; if, however, the company is entitled to the insurer's benefit without restriction during the loyalty period, the income may, depending on the structure, arise later, when the employee becomes entitled (Szja tv. Section 7(1a)).
- Before the company builds a loyalty (retention) programme on it, the loyalty period, the value withheld on leaving and who bears the taxes and contributions must be clarified in the benefits regulations and with a tax advisor – rules are needed, not promises.
Risk element and savings element: two products in one framework
Section 3, point 91 of the Personal Income Tax Act (Szja tv.) defines risk insurance as personal insurance that has neither a maturity benefit nor a surrender value. Most group packages are of this kind: death, accident, hospital or critical illness cover pays out on an event, and if the event does not occur, nothing is left of the premium – this is the basic logic of group insurance. The savings element, also known as the capital-accumulation element, by contrast accumulates part of the premium in the insured person's name: in a traditional structure, in a reserve managed by the insurer; in a unit-linked version, in investment funds chosen by the company or the employee. This element has a surrender value and a maturity benefit, which means that its legal and tax classification is also different. In a group framework contract, the two can also appear together: the risk cover protects the employee, while the savings part serves the company's retention goals. The premiums and conditions of the two elements must be kept separate in the contract – not least because of taxation.
How does it work as a loyalty programme?
The HR side of the structure is simple. The policyholder is the company, the insured person is the selected key employee, and the company pays the premium under internal regulations. The regulations set out the loyalty period – typically several years – and how the accumulated value passes to the employee when it ends: by a change of policyholder, whereby the colleague becomes the owner of the contract, or by a payout. If the employee leaves before the end of the loyalty period, the accumulated value, depending on the structure, stays with the company, is partly due to the employee or is forfeited under the conditions laid down in the regulations – this is what makes it work as a retention tool. Its effect is twofold: a visible balance growing year by year, which is tangible for the employee, and an exit cost, which makes leaving a more considered decision. This same duality is also its limitation. In the unit-linked version, the return carries investment risk and the balance can also fall; in the traditional version, growth is more modest but more predictable. The programme only fulfils its role if the employee knows exactly what they will receive, when and on what conditions – the matching of goals and tools described in the basics of benefits strategy matters particularly here. A poorly communicated loyalty programme does not bind people; it breeds mistrust.
Why is it taxed differently from risk cover?
Under Section 3, point 89 of the Personal Income Tax Act, a taxable insurance premium is the premium paid by another person under a contract taken out on a private individual as the insured person, in the hands of the insured private individual. For group insurance, sub-point b) distinguishes two cases: unless it can be determined otherwise on the basis of the contract, the portion of the group insurance premium proportionally attributable to the private individual is the income of the insured person; if the premium attributable to the private individual cannot be determined even by apportionment, then the group insurance premium as a whole. The two are treated differently: where the portion attributable to the insured person can be determined, the premium is the employee's income according to their legal relationship – in an employment relationship it is taxed as wages – and only where it cannot be determined even by apportionment is it a specified benefit (egyes meghatározott juttatás, Szja tv. Section 70(6)(b)). The article on premiums attributable to individual employees goes through this dividing line for risk covers. For the savings element, the question is settled by the structure: the accumulation takes place in the insured person's name, on their own balance, so the premium attributable to them can by definition be determined. When the premium becomes the employee's income, however, depends on who is entitled to the insurer's benefit: under Section 7(1a) of the Szja tv., if the company paying the premium is entitled to the insurer's performance without restriction – many loyalty programmes are structured this way until the end of the loyalty period – no revenue arises for the employee when the premium is paid; the income arises when the employee becomes entitled, for example through the change of policyholder or the payout; if the employee is entitled from the outset, the premium is taxed when it is paid. Which case your own structure falls under is for the tax advisor to decide. A tax information sheet on group insurance, published on a Hungarian bank's website and based on tax-advisor and Ministry of Finance rulings, puts it this way: the premium of capital-accumulation group insurance “is also taxable according to the legal relationship”, because the savings portion attributable to each insured person can be clearly determined; the professional opinion given by the Ministry of Finance in April 2020 at the request of MABISZ (the Hungarian insurers' association) – which, in its own words, has no binding legal force – says the same: if the per-capita premium of capital-accumulation group insurance cannot be determined from the contract, it must be divided among the insured persons by apportionment, and it is income belonging to the consolidated tax base according to the legal relationship. The same information sheet – and the 2020 Ministry of Finance opinion – treats the premium of undivided, banded-rate group risk insurance with annual settlement as a specified benefit; however, this depends on the wording of the contract and is not a general rule: where the risk premium attributable to the insured person can be determined from the contract or by apportionment, it is income according to the legal relationship.
What does this mean in practice for the company and the employee?
A premium taxed as wages means that the premium for the savings element appears as income in the employee's payroll: the employee pays personal income tax and contributions on it, and the company pays the employer's taxes and contributions on wages – while the money sits in the insurance, and if the colleague leaves before the end of the loyalty period, they may never get access to it. This is the most delicate point of the loyalty programme, and it is not for the insurer but for the benefits regulations and the tax advisor to answer: who bears the taxes and contributions on the premium, whether the company grosses up the benefit, what happens on leaving to the premium on which tax has already been paid, and when the income arises – when the premium is paid or when the entitlement is acquired. The answer depends on the details of the structure, so nothing more can be stated definitively here than that the question must be clarified in writing before launch. On payout, under Hungarian rules the return portion of the insurer's benefit may be taxed for the private individual as interest income, with a reduction depending on the term, while the part of the premium already taxed as income is not taxed again – the exact treatment, tailored to the structure, is to be confirmed by the accountant and the tax advisor. The comparison of a pay rise and a group benefit therefore works out differently for the savings element than for the risk element: here, the tax advantage lies not in how the premium is treated but in the deferral and the retention effect.
When is it worth building on, and when is it not?
- It is worth it if a clearly defined group of key people is involved, the company is thinking over a horizon of several years, and its cash flow can sustain the regular premium even if results bring a weaker year.
- It is worth it if the company is prepared to write down the rules – loyalty period, partial entitlement, leaving, retirement, death – and records them in an agreement signed by the employee.
- It is not worth it if the aim is to show appreciation for the whole team: there, the risk package and cafeteria (flexible benefits) elements reach more people with less administration.
- It is not worth it if the company would communicate the investment return as a promise: the programme's binding force lies in the conditions, not in the return.
If the company sets off in this direction, the order is as follows: defining the goal and the group concerned, writing the loyalty period and the leaving rule, consulting the tax advisor and the accountant on the treatment of the premium and the payout, and after that requesting quotes from insurers, with the premiums and conditions of the risk element and the savings element shown on separate lines. If you let me know, I'll help where I can in putting together the quote table – I leave the tax question to the relevant specialist, because here the details decide.
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Sources
- Act CXVII of 1995 on Personal Income Tax (Szja tv.) – Section 3, point 89 (taxable insurance premium), point 91 (risk insurance), Section 70(6)
- CIB (cib.hu, insurance document library) – Taxation of group insurance: tax information supplementing the Deloitte opinion, with reference to Ministry of Finance rulings no. PM/19271/1/2018 and PM/27058/2019 (reviewed 20 February 2025)
- Ministry of Finance – opinion on personal risk insurance (MABISZ extract, April 2020): capital-accumulation group insurance taxed by legal relationship
