There is more to know about Insurance. Part 3

Fringe benefits

Presented by      By John Wolf and Tom Cullen CPA like you to know more about Insurance

Continuing from Insurance part 2


The amount of taxable income, if any, is to be reported on the Form W2 of the employee, but it is not subject to withhold taxes (R.P. 67-19; Reg. §31.3401(a)(14)-1).  2021 Version of Publication 15-B, Employer’s Tax Guide to Fringe Benefits

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TEFRA (1982), enacted §79(d) which provides that the $50,000 exclusion for income tax purposes shall not apply concerning any key employee in the case of a discriminatory group term insurance plan. This provision applies to taxable years beginning after December 31, 1983. Are employers allowed to offer different benefits

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Eligibility & Benefits

A group term life insurance plan will not be regarded as discriminatory unless it discriminates in favor of key employees concerning eligibility and to the type and amount of benefits available. A plan will be nondiscriminatory when:

(1) It benefits at least 70% of the employees;

(2) At least 85% of the employees who are plan participants are not key employees;

(3) The plan benefits such employees as qualify under a classification set up by the employer and found by the IRS not to be discriminatory in favor of key employees; or

(4) In the case of a cafeteria plan, the requirements of §125 are met. The requirement that the amount of group term life insurance benefits available not discriminate can be satisfied where such amount bears a uniform relationship to the total compensation or the basic or regular rate of compensation to the employees.

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Excluded Employees

However, the following employees need not be considered in determining

whether a plan is discriminatory:

(a) Employees who have not completed at least three years of service;

(b) Part-time or seasonal employees;

(c) Union employees if plan benefits were the subject of good faith

bargaining between the employee’s union representative and the employer; and

(d) Certain non-resident aliens.

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Policy Requirements

Regulation §1.79-1(a) provide that life insurance is not group term life insurance Policy Requirements  for purposes of §79 unless:

(1) It provides a general death benefit that is excludable from income under §101(a)(1);

(2) It is provided to a group of employees;

(3) It is provided under a policy carried directly or indirectly by the employer.

(4) The amount of insurance provided to each employee is computed under a formula that precludes individual selection. This formula must be based on factors such as age, years of service, compensation, or position. The condition may be satisfied even if the amount of insurance provided is determined under a limited number of alternative schedules that are based on the amount that each employee elects to contribute. However, the amount of insurance provided under each schedule must be computed under a formula that precludes individual selection.

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Ten Employee Rule

As a general rule, life insurance provided to a group of employees cannot qualify as group term life insurance for purposes of §79 unless, at some time during the calendar year, it is provided to at least 10 full-time employees who are members of the group of employees. For purposes of this rule, all life insurance provided under policies carried directly or indirectly by the employer is taken into account in determining the number of employees to whom life insurance is provided (Reg. §1.79-1(c)(1)).

Where a plan consists of 10 or more full-time employees, there are no IRS restrictions on the amounts of coverage that can be provided to various classes of employees. The key point is that the coverage must be provided in such a manner as to preclude individual selection.

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Disclaimer: John Wolf and are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice.  We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action.  The information presented on this website is offered as a general guide only.