Wednesday, August 13, 2014

Section 79: It’s More Than Group Term Insurance

Mention Internal Revenue Code Section 79 to most business owners and advisors and typically they will think “group term insurance.” Now that is changing. Ironically, recent IRS pronouncements that removed some of the tax benefits of Section 79 may have increased awareness of its potential as a planning strategy. Technical issues. Under a nondiscriminatory Section 79 plan, employees can receive up to $50,000 of term life insurance income tax-free. Employers may provide employees term life insurance in excess of $50,000, so long as they report the value of the excess coverage on the employee’s W-2 as compensation. The value of the excess term coverage is determined under Table I of the Treasury Regulations, which sets forth uniform premiums computed on the basis of 5-year age brackets. So long as the employer is not directly or indirectly a beneficiary of the insurance and the compensation is deemed “reasonable,” employer contributions to the plan should be tax deductible. Technical issues. Under a nondiscriminatory Section 79 plan, employees can receive up to $50,000 of term life insurance income tax-free. Employers may provide employees term life insurance in excess of $50,000, so long as they report the value of the excess coverage on the employee’s W-2 as compensation. The value of the excess term coverage is determined under Table I of the Treasury Regulations, which sets forth uniform premiums computed on the basis of 5-year age brackets. So long as the employer is not directly or indirectly a beneficiary of the insurance and the compensation is deemed “reasonable,” employer contributions to the plan should be tax deductible.
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