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Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 1
• Life insurance provided to a group of employees under a group insurance contract held by the employer
• If plan qualifies under IRS Code Sec. 79, the cost of the first $50,000 of insurance is tax-free to employees
What is it?
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 2
When is it indicated?
• Virtually all employees have need of basic life insurance
• Tax advantage for first $50,000 coverage makes it a common employee benefit, at least to that face value
• Group-term plans may also provide cost-effective life insurance coverage in amounts above $50,000
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 3
Design Features: Nondiscrimination Requirements
• Sec. 79 prescribes rules to prevent discrimination in favor of key employees (as defined in IRC)
• Nondiscrimination requirements do not apply to plans of churches, synagogues, or certain related organizations
• If rules are not met, key employees lose tax advantage on first $50,000 of coverage
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 4
Design Features: Coverage Rules
Plan must– benefit at least 70% of all employees– benefit a group of which at least 85% are not key employees– benefit a nondiscriminatory classification of employees– meet Sec. 125 nondiscrimination rules if in a cafeteria plan
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 5
Design Features: Benefit Rules
• Benefits must not discriminate in favor of key employees
• All benefits available to key employees must be available to other plan participants
• If life insurance coverage is same % of compensation for all employees will not violate benefit nondiscrimination rule
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 6
Design Features: Who Can Be Excluded
• Employees who have not completed 3 years of service
• Part-time or seasonal employees• Employees who are part of a collective bargaining
unit that has engaged in good faith bargaining on issue of death benefits
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 7
Requirements of Section 79 Regulations
To obtain the $50,000 exclusion, policy must– provide a general death benefit– be provided to group of employees as compensation for
services– be carried directly or indirectly by employer– determine insurance amounts by formula that precludes
individual selection
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 8
Group Life Insurance Carve-Out for Executives
Concept– Executives may be able to obtain better coverage if removed
from employee group covered by a group-term life contract
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 9
Group Life Insurance Carve-Out for Executives
Advantages of carve-out coverage over group-term– Executives can have more coverage than provided under
group-term plan– Plan can provide portable cash growth– Cost to employer can be favorable– Carve-out can save an otherwise discriminatory plan
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 10
Group Life Insurance Carve-Out for Executives
How to structure the carve-out coverage– All methods used to finance executive life insurance are
generally available for carved-out benefits
- bonus or Sec. 162 plans
- split dollar plans
- death benefit only plans– Design plan to avoid designation as Sec. 79 status
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 11
Tax Implications
1. Cost of first $50,000 of coverage is tax-free to employee
2. Employer paid premium for additional insurance is treated as taxable income to employee using Table I rates
3. Tax-free death benefit to beneficiary
4. Employer can deduct premiums paid as business expense
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 12
Tax Implications
5. Employer can deduct premiums paid as business expense
6. Employer must pay employment taxes on extra compensation that employee includes in income as result of plan coverage over $50,000 or as result of compliance with nondiscrimination rules
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 13
ERISA and Other Requirements
Group-term life insurance is a “welfare benefit plan” and subject to all applicable ERISA requirements
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 14
Alternatives
1. Life insurance in a qualified plan
2. Split dollar life insurance
3. Death benefit only (employer death benefit)
4. Personally owned insurance
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 15
True or False?
1. All premiums for group term life insurance are tax free to the employee.
2. When applying the percentage tests, all employees must be included.
3. A carve-out plan allows an employer to treat highly compensated employees differently than rank-and-file employees.
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 16
True or False?
4. When an employer pays the premiums, life insurance beneficiaries must pay a tax when death benefits are received.
5. The employer can deduct premiums paid for employee group-term life as a business expense.
6. All employer-paid premiums are treated as income for the employee and subject to FICA and FUTA tax.
Group-Term Life Insurance Chapter 41Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 17
Discussion Question
To what extent can group-term insurance be used to meet insurance needs of select groups, for example:
– self-employed persons– S corporation shareholders– employee group smaller than 10 employees– persons needing a permanent insurance benefit– persons desiring group universal life