Insurance information. Part 4

Presented by Paystrubmakr.com By John Wolf and Tom Cullen CPA

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Less Than Ten Employees

Even if there are fewer than 10 full-time employees who are members of the group, the plan may still qualify if the insurance is provided to all full-time employees of the employer, and the amount of insurance provided is computed either as a uniform percentage of compensation or on the basis of coverage brackets established by the insurer. However, the amount provided under either method may be reduced if the employee does not show proof of insurability satisfactory to the insurer. In general, no bracket may be more than 2 1/2 times as much as the next lowest bracket and, the lowest bracket must be at least 10% as much as the highest bracket (Reg. §1.79- 1(c)(2)(ii), (iii); R.R. 75-528).

non-discriminatory coverage

These regulations do not reflect TRA ‘84 whereby most employers will elect non-discriminatory coverage for all employees instead of basing amounts of coverage on various employee classifications. Permanent Benefits In order for the cost of group term life insurance to be currently deductible to the employer, the policies must not provide any permanent benefits to the employees. Under current regulations, a “permanent benefit,” is an economic value extending beyond one policy year; for example, a paid-up or cash surrender value that is provided under a life insurance policy.

Small Business Health Care Tax Credit Estimator

The term “policy” includes two or more obligations of an insurer (or its affiliates) that are sold in conjunction. Obligations that are offered or available to a group of employees are sold in conjunction if they are offered or available because of the employment relationship. The actuarial sufficiency of the premium charged for each obligation is not taken into account in determining whether the obligations are sold in conjunction.

Nondiscrimination Requirements

Nondiscrimination Requirements. As a result of TRA ‘84, the IRS issued temporary regulations as to the nondiscrimination requirements for group term insurance plans (Reg. §1.79-4T, effective for taxable years beginning after December 31, 1983). Where the group term plan is discriminatory in nature, key employees, within the meaning of §416(i) will be currently taxed based on the cost of coverage at the insurer’s rate. As to the determination of whether benefits are discriminatory, the regulations employ a facts and circumstances test. Thus, it is possible to divide employees into classes for determining coverage, as long as each class can meet the requirements of §79(d)(2)(A) and §79(d)(3)(A).

Retired Lives Reserve. The retired lives reserve fund is generally an extension of a group term insurance plan. Under such a plan a reserve fund is set up, and actuarial work determined contributions are made to the fund. At retirement, the reserve fund uses the accumulated contributions to buy term life insurance protection for the employee during retirement. These plans tend to benefit the principles of a corporation since they are most likely to remain with the company through retirement. Guide To Whole Life Insurance

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Revenue Ruling 68-577

Under R.R. 68-577, in order for the company to be able to deduct the premiums, the following requirements must be met:

(1) There must be level annual payments to the fund that is an actuarial determined;

(2) The funds must be used exclusively to pay group term insurance premiums as long as any employee is alive;

(3) The estimated cost of funding such a plan must be allocated over each employee’s working life; and

(4) The plan guarantees that no insurance benefits will ever be paid, but only pays the premiums.

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