What Is Group Term Life Insurance?

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Employers can establish a group term life insurance arrangement under Internal Revenue Code Section 79 that provides tax-advantaged coverage to employees. The employer may be a corporation, limited liability company, partnership or sole proprietorship. However, sole proprietors, partners and S corporation shareholder-employees owning more than 2% of the company stock aren’t eligible employees for purposes of group term life coverage under IRC Section 79, so their group term coverage is not excludable from gross income. To qualify for the tax advantages, a group term life insurance arrangement cannot discriminate in favor of “key employees” with respect to either eligibility or benefits. The definition of “key employee” is spelled out in the tax law and based on compensation and ownership, with limits subject to annual inflation adjustment.

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What Are The Tax Benefits?

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The employer can generally deduct the premiums it pays for group term life insurance coverage on employees, provided the employer is not the beneficiary of the coverage. The employees can exclude from their gross income the employer-paid costs of the first $50,000 of group term life coverage. Any coverage in excess of that amount is taxed to the employee under favorable rates in an IRS table. If the employee dies while the coverage is in effect, the death proceeds are generally excludable from the beneficiary’s gross income.

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How Does It Work?

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An employer’s group term life insurance arrangement must meet several requirements to qualify for favorable tax treatment under IRC Section 79:

• It must provide a “general death benefit” of the type excludable from gross income.

• The employer must provide the coverage as compensation for services to employees whose membership in the group is based solely on age, marital status, length of service, job responsibilities or some other factor related to employment.

• The insurance coverage must be provided under either a master policy or a group of individual policies carried directly or indirectly by the employer.

• The amount of each employee’s coverage must be determined on some basis that precludes individual selection, such as compensation or years of service.

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What Are The Advantages To The Employer?

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Premium payments are generally tax-deductible to the employer. In addition, current employees are more likely to remain with the company and be productive if they have a basic level of life insurance protection for their survivors. Finally, potential recruits often expect basic group life coverage when considering employment.

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What Are The Advantages To The Employee

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The employee secures up to $50,000 of employer-paid group term life insurance coverage without having to include the employer-paid cost in gross income. Also, death proceeds received by the employee’s beneficiary are generally income tax free.

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Whi Is Eligible?

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The employer may be a corporation, limited liability company, partnership or sole proprietorship. However, sole proprietors, partners and S corporation shareholder-employees owning more than 2% of the stock aren’t considered eligible employees under the terms of IRC Section 79, so their group term coverage is not excludable from gross income. A group term life insurance arrangement generally must cover 10 or more full-time employees at some point during the year. A single-employer arrangement covering fewer than that number may be eligible if:

• it covers all full-time employees;

• the amount of coverage is determined either as a uniform percentage of compensation or under coverage brackets in which no bracket exceeds specific percentages designed to prevent discrimination

• any required evidence of insurability is determined only by a medical questionnaire and not a physical exam, and ​​​​​​​

• any other medical information voluntarily provided by the employee is not used to determine premium rates.

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Other Requitements?

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• To qualify for favorable tax treatment, the arrangement must provide a “general death benefit” of the type that is excludable from gross income.

• The employer must provide insurance coverage as compensation to employees whose membership in the group is based solely on age, marital status, length of service, job responsibilities or some other factor related to employment.

• The coverage must be provided under either a master policy or a group of individual policies carried directly or indirectly by the employer.

• Each employee’s coverage must be determined on an impartial basis (such as compensation or years of service) that prevents individual selection.

• If the group term arrangement fails to meet these tests, each employee’s share of the employer’s premiums is includible in his or her gross income.

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