Today’s guest columnist is risk-management consultant David Brookbank.
I’ve been advising college athletic departments for many years in the areas of risk management, specifically as it pertains to disability insurance for students with professional potential. The disability insurance industry for college athletes has seen its share of disruption at times, but Name Image and Likeness (NIL) has added a whole new dynamic to the equation.
Earned income is a new problem for collegians who profit from NIL. Claiming the NIL compensation as income and paying taxes on it may be problematic if the athlete has not adequately planned for it and may come as a significant surprise around tax time. Based on recent studies, only around 20 athletes within college athletics are expected to earn over $400,000 from NIL, with just the top eight expected to eclipse $1 million dollars this year.
But let’s use those eight outliers as an example. If they had this income paid directly to them as an individual and received a form 1099 on the payment, the taxes would be astronomical. Because the U.S. tax code is progressive, the individual would pay income tax beginning at 10% and graduating incrementally to 12%, 22%, 24%, 32%, 35%, and maxing out at 37% for amounts over $539,000, assuming the taxpayer is a single filer. Add to this the potential for the alternative minimum, state income, and FICA taxes, and the individual may pay well over 50% of annual NIL earnings to the government.
One solution for these elite individuals would be the formation of a limited liability corporation (LLC) or some other corporate entity to harbor the NIL proceeds. The entity receives the income rather than the individual, and, therefore, would deduct certain items as per the Internal Revenue Code. For example, an elite athlete who formed a corporation would be allowed to expense certain items (an automobile lease for business purposes, meals and entertainment directly tied to business discussions), set up a payroll account, and contribute to a simplified employee pension (SEP). They’d also be able to deduct—wait for it—their disability insurance.
Disability insurance may be one of the best deductions for an individual with significant NIL income. Why? The premium payments are massive, as much as $350,000 for a top athlete. Of course, by deducting the premium payments from the business, any benefits received under the disability policy would be taxable as income when/if received. Regardless, the odds are in favor of the insurance company regarding the payouts, since roughly 1-2% of permanent total disability (PTD) policies pay claims. However, the question must be considered: Would you rather have a $250,000 tax deduction and take the chance on the insurance paying out, or pay taxes on the total amount of NIL compensation with no deduction?
Another interesting development since legalized NIL compensation came on the scene has been the significant increase in offers in the amount of disability coverage for the most elite college athletes. It is not uncommon for these gifted few to be offered as much as $20 million of PTD insurance accompanied by loss of value (LOV) and critical injury coverage. Premiums for this coverage have exponentially increased, to as much as $290,000 for a comprehensive policy, including PTD and LOV. Add in critical injury coverage, and the premiums will eclipse $350,000.
Disability coverage within intercollegiate athletics has become an arms race, to say the least, and is definitely a subject of athlete discussions regarding recruitment, retention, and now the transfer portal. We are seeing schools actually increase coverage for elite athletes. The ability to pay for disability insurance and claim a deduction for the premium for a corporation should not have a significant impact on the school’s attitude toward paying for coverage, since the school is limited by the NCAA-regulated student assistance fund from which premiums are paid.
Additionally, schools are still willing to fund disability coverage for their athletes; given that the average NIL deal in Division I athletics was $1,036 in 2021 (according to Opendorse), the vast majority of college athletes do not earn enough to pay for a disability insurance policy to protect their future earnings. The ability to pay for additional coverage beyond what the school funds is definitely possible for the most marketable athletes, especially given that premiums would be tax deductible for the athlete’s portion of the premium. Additionally, the college athlete could pay for a policy without borrowing funds, which is another bonus.
The new NIL world offers new financial opportunities, and for a select few, deducting disability insurance may be a way to preserve some of their new wealth.
Brookbank is a consultant for college and professional athletics specializing in risk management with over 30 years of experience. He advises more than 50 Division I universities and works with over 250 college athletes per year who end up turning professional.