Avoiding Employer-Carried Policies

If an employer provides employer-paid basic coverage up to $50,000 under a policy that is separate, as previously described, from a policy providing excess coverage for which employees pay the entire cost on an after-tax basis, the employer may avoid imputing income altogether. The employer’s paying for the basic
coverage means that all coverage will be considered employer-carried if it is provided under the same policy as the basic coverage. With respect to coverage under that policy up to $50,000, employees will have the Section 79 exclusion, and the employer will not be required to impute income.
If a separate policy provides only coverage for which employees pay all required premiums with after-tax income then, provided that premiums under that policy do not straddle Table 1, that policy will not be employer-carried and may not be subject to Section 79
imputing requirements. A policy whose rates straddle Table I will be deemed employer-carried. An employer avoids these straddle situations by making sure that either:

• None of the rates charged under the excess policy are above the rates set by Table I (stated differently, each of the rates are at or below the corresponding Table I rate), or
• None of the rates charged under the excess policy are below the rates set by Table I (stated differently, each of the rates are at or above the corresponding Table I rate).

Example
ABC Company maintains two group-term life insurance policies under which it provides group-term life insurance to its employees. ABC pays the premium for coverage equal to one-times base salary, and this basic coverage is provided under a policy issued by Insurer Y (the Basic Policy). Coverage of an additional one-times base salary amount is voluntary. Employees electing this additional coverage pay the full premium charged by the insurer for it out of after-tax pay. The extra coverage is provided under a policy also issued by Insurer Y (the Excess Policy). The Basic Policy and the Excess Policy are not crosssubsidized in any way, and the premiums charged under each are properly allocated for purposes of Section 79. ABC elects to treat the two policies as separate from one
another. Ms. X is 51 years old, has annual base salary of $45,000 and elects both coverages.

Premiums under the Excess Policy are as shown in the following chart in contrast to Table I rates. 

Group-Term Life Insurance Table I Rates Monthly Costs/$1,000 of Coverage
Age* Excess Policy Rates Rate
Under 25 $0.06 $0.05
25-29 0.07 0.06
30-34 0.08 0.08
35-39 0.1 0.09
40-44 0.14 0.1
45-49 0.18 0.15
50-54 0.23 0.23
55-59 0.64 0.43
60-64 0.83 0.66
65-69 1.37 1.27
70 and over 3.75 2.06

*Employee’s age on the last day of the calendar year.

Result under the Basic Policy: The Basic Policy will be deemed carried by ABC for Section 79 purposes because ABC pays for coverage provided under the Basic Policy. Accordingly, assuming that coverage under the Basic Policy meets the other Section 79 requirements, coverage provided to an employee under the Basic Policy up to $50,000 of coverage is excluded from the employee’s income. Ms. X has only $45,000 coverage under the Basic Policy and the value of that coverage is fully excluded from her income. (The Table I cost of coverage under the Basic Policy exceeding $50,000 would be included in the taxable income of employees receiving that coverage.)
Result under the Excess Policy: ABC elected to treat the Basic Policy and the Excess Policy as separate policies, and ABC does not contribute to, or allow employee pre-tax contributions to, coverage under the Excess Policy. In addition, the rates charged to employees for coverage under the Excess Policy are at or above (in other words, they do not ‘straddle’) the Table I rates. Therefore, the Excess Policy is not ‘carried directly or indirectly’ by ABC for purposes of Section 79, and ABC does not have to determine how much, if any, imputed income Ms. X might have because of her coverage under the Excess Policy.
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