Carried Directly or Indirectly by the Employer; the ‘Straddle Rule’

Section 79’s rules apply only to coverage that is provided under a policy that is ‘carried directly or indirectly’ by an employer. Those rules include the requirement to impute income at Table I rates on
coverage amounts exceeding $50,000, as well as the exclusion of the value of coverage up to $50,000. Consequently, employers generally want to provide coverage up to $50,000 under an employer carried policy (to make the first $50,000 of coverage
nontaxable). At the same time, they generally want to provide employee-paid coverage exceeding $50,000 under a policy that is not employer-carried (to avoid imputing income based on Table I rates). A policy is considered ‘employer-carried’ (directly or
indirectly) if:

1. The employer pays any cost of the life insurance, or
2. Employees pay for coverage under the policy on a pre-tax basis, or
3. The employer arranges for the premium payments and the  premiums paid by at least one employee subsidizes those paid by at
least one other employee (the ‘straddle’ rule).

This means that any policy providing any employer paid coverage (or coverage paid on a pre-tax basis) will always be employer-carried. The employer cannot avoid imputing income on employee-paid coverage under such a policy and must arrange a separate policy to provide employee-paid coverage to avoid imputing. In addition, the employer must ensure that the policy providing the employee-paid coverage has a rate structure that does not ‘straddle’ Table I. Such
straddling occurs when the life insurance rates of one age group of employees are less than the Table I rates, while the insurance rates of another group of employees are equal to or greater than the Table I rates. The rates charged under that policy must be at or below corresponding Table I rates, or all such rates must be at or above corresponding Table I rates.

In these cases, imputed income creates a taxable event. This generally occurs when there is a composite rate for all participants in a voluntary or supplemental life plan. As a result, some employees pay more than their actual coverage cost (a rate that would be based
upon their age) and others pay less. The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost. Because the employer is affecting the premium cost through its subsidizing and/or redistributing role,
there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged.

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