Internal Revenue Code Section 79
Group Term & Group Permanent Life Insurance
Group Insurance is a Significant Employee Benefit
A business can provide group insurance for employees and take an income tax deduction for premiums paid and have employees receive favorable taxation on the coverage. If life insurance is needed, finding and paying premiums with after-tax dollars may be expensive.
The source of the premium is the business. Group insurance premiums are income tax deductible for the business and may have a significant effect on corporate and personal tax liability. Life insurance protection is available without paying the entire premium cost on an individual after-tax basis.
It Works Like This
- The business adopts a group insurance plan that qualifies under Section 79 of the Internal Revenue Service Code.
- The business pays income tax deductible contributions to the insurance company.
- The employee is not taxed on the full amount of the premium payment but rather on the imputed income attributable to his or her coverage in excess of $50,000. However, any employee contributions reduce this imputed income dollar for dollar. This tax benefit is not available to key employees if the plan is discriminatory (see below).
- The employee is taxed on the permanent portion of the total coverage less any employee contributions.
- Death benefits are paid to the employee's beneficiary income tax free.
Advantages to the Business
- A Section 79 Plan is an attractive fringe benefit to be used to retain and reward key employees.
- The business is entitled to "an ordinary and necessary business expense" income tax deduction, provided that total compensation to any employee is reasonable.
- The business is also entitled to income tax deductions for any additional premiums for waiver of premium, accidental death, and special class ratings although the employee does not have to report these cost as income.
- A Section 79 Plan may be used in conjunction with and "super-imposed" on a group master contract or individual contracts.
- At cross-over, the imputed income charges to the employee excc; amount. At this point, the business could bonus the premium to the employee.
Advantages to the Employee
- The employer-paid cost of the first $50,000 of group term is excluded from the key employee's gross income, provided that the plan is nondiscriminatory.
- Group term insurance cost over $50,000 (subject to state maximums) is taxable to the employee, based on favorable Table I premium rates. Therefore, the key employee receives insurance protection at a lower cost that if purchased individually.
- Any additional waiver of premium cost, accidental death and special class ratings are not included in the employee's income.
- The employer-paid cost of group term life insurance above $50,000 is based on favorable Table I rates for retired employees and excluded from income for totally disabled employees.
- At termination of employment or coverage under the plan, permanent contracts may be continued by the key employee.
- Death proceeds paid to a named beneficiary from a Section 79 Plan are received income tax free. If properly structured, the proceeds may federal estate taxes.
- Death proceeds may be used for estate liquidity or family income.
Only through a general review of your specific situation can it be determined if there are tax advantages available to you through our products, one of which is life insurance. You should consult your tax advisor or attorney on your specific situation.
Section 79 Permanent Insurance Plan
- Must be non-discriminatory
- Employer installs a Group Life Insurance plan with permanent benefits. Insurance amounts must be under a formula that precludes individual selection; for example, a uniform percentage of compensation, or a flat amount for each employee.
- Employee owns a Universal Life contract payable to his personal beneficiary. Internal Revenue has set the Maximum Guideline Level Premium allowed by law for specific age and amount. Employee will be taxed on the permanent benefit portion of the contract.
- Employee contributes up to one-half of this maximum amount to the employer, who matches the contribution and remits one check to the insurance company. This process can result in no imputed income to the employee.
- Employee owns the policy and is free to leave the resulting cash values to earn interest or draw them out as needed.
- If employee terminates employment, he can continue the policy by paying additional premiums himself as needed or letting policy run off existing cash values.
- Generally at least ten employees must be covered. Less than ten employee groups may qualify under Section 79 if they fall within an exception to the general rule.
- Tax deducts premiums actually contributed on corporate tax return, under "Employee Benefit Programs."
- No Government approval required.
- Minimum record-keeping
- Employee has includable income equal to the cost of the permanent benefit provided by the employer, reduced by any amounts paid by the employee.
- If employee contributions are equal to or greater than employer contributions, the net result is no taxable income to the employee on the cost of insurance. Any dividends actually or constructively received are taxed. (Treas. Reg. 1.79-1(d)(1))