Calculating the tax liability
In a non-discriminatory Section 79 plan the first $50,000 of coverage is provided free to all employees. Any group coverage over this amount is deemed a benefit for which the employee must pay. The pure insurance portion is factored using the IRS’s published Table I rates (scroll to page 5). If using permanent insurance the portion calculated as the ‘permanent benefit’ takes into account premium(s) paid, accumulated and cash surrender value, and other policy factors.
There are generally four main conditions which must be met when installing a Section 79 plan:
- The plan must provide a death benefit excludable from income under Code section 101(a)
- Must be provided to a group of employees
- Must be provided under a policy carried directly or indirectly by the employer
- Maximum death benefits for each employee based on a multiple of compensation
In order for a Section 79 plan to maintain its non-discriminatory form other conditions must be met:
- Cover at least 70% of employees
- No more than 15% of the participants are key employees
- Benefits based on reasonable classifications
It is possible to have what is deemed a discriminatory Section 79 plan. Under a discriminatory plan the first $50,000 of death benefit coverage is not free for owners and key employees. Cost will again be based on the IRS Table I rates. Rank and file employees maintain their free benefit whether or not the plan is discriminatory.
Yet another set of requirements comes into play if the company has less than 10 employees.
Under 10 employees
- Employees with less than six months of full-time employment may be excluded
- Benefits must be based on a uniform percentage of compensation or coverage brackets, such that no bracket is more than 2.5 times the next lowest bracket and the lowest bracket is at least 10% of the highest bracket
With 10 or more employees
- Employees with less than 36 months of full-time employment may be excluded
- Employees under the age of 18 or over the age of 64
- Part-time or seasonal employees
- Employees covered under a union contract, provided the group term life insurance benefits were the subject of good faith bargaining
- Anyone not medically approved
- Anyone choosing to opt out
Coverage for spouses and dependents
The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimisfringe benefit. Some cases may allow more.