Group Term Life Insurance

<div class="Section1"><br /> <br /> The cost of excess group term life insurance is not subject to withholding, but an employer that provides excess coverage must file an information return for each calendar year and must provide statements to employees receiving the excess coverage. Each employer reports as if it were the only employer carrying group term insurance on an employee.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> An employer that maintains a group term life insurance plan is required to file an information return with the IRS indicating the number of its employees, the number of employees eligible to participate in the plan, the number of employees participating in the plan, the cost of the plan, the taxpayer identification number of the employer and the type of business in which it is engaged. The employer also must report on the return the number of its highly compensated employees, the number of highly compensated employees eligible to participate in the plan, and the number of highly compensated employees actually participating in the plan.<a href="#_ftn2" name="_ftnref2">²</a> For plan years beginning prior to the issuance of further guidance from the IRS, group term life insurance plans are not required to meet the reporting requirements of IRC Section 6039D.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 6052(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 6039D.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Notice 90-24 1990-1 CB 335, as modified by Notice 2002-24, 2002-1 CB 785.<br /> <br /> </div>

<div class="Section1">Yes. A policy that provides a permanent benefit may be treated in part as group term life insurance if (1) the policy or the employer designates in writing the part of the death benefit that is group term life insurance, and (2) the part of the death benefit designated as group term for any policy year is at least the difference between the total death benefit under the policy and the employee&rsquo;s deemed death benefit (defined below) at the end of the policy year.<a href="#_ftn1" name="_ftnref1">¹</a>A permanent benefit is an economic value extending beyond one policy year that is provided under a life insurance policy.<a href="#_ftn2" name="_ftnref2">²</a> For example, paid-up or cash surrender values are permanent benefits. The following features are not permanent benefits:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; a right to convert or continue life insurance after group life insurance coverage terminates;<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; any other feature that provides no economic benefit to an employee other than current insurance protection; and<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; a feature providing term life insurance at a level premium for a period of five years or less.</blockquote><br /> To determine whether a policy provides a permanent benefit, it is necessary to determine what a policy is. Under the broad definition of &ldquo;policy&rdquo; provided in the regulations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="241">241</a>), if permanent benefits are provided (by reason of the employment relationship) under unrelated plans to members of a group provided group term life insurance is issued by the same insurer or an affiliate, they would appear to be permanent benefits under the same policy that provides group term life insurance.<br /> <br /> If a policy providing group life insurance provides permanent benefits, the cost of the permanent benefits, reduced by amounts paid for them by an employee, but not by amounts paid for group term life insurance, is included in the employee&rsquo;s income according to a formula. The formula for determining the annual cost of the permanent benefit is: X(DDB2 &ndash; DDB1). DDB2 is the employee&rsquo;s deemed death benefit at the end of the policy year; DDB1 is the employee&rsquo;s deemed death benefit at the end of the preceding policy year; and X is the premium for one dollar of paid-up whole life insurance at the employee&rsquo;s attained age at the beginning of the policy year.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The deemed death benefit at the end of a policy year is equal to R/Y where R is the net level premium reserve at the end of that policy year for all benefits provided to an employee by the policy, or if greater, the cash value at the end of the policy year; and Y is the premium for one dollar of paid-up whole life insurance at the employee&rsquo;s age at the end of the policy year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The net level premium reserve (R) and the net single premiums (X or Y) in the formulas must be based on the 1958 CSO Mortality Table and 4 percent interest.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> If a policy year and an employee&rsquo;s tax year are not the same, the cost of the permanent benefits is allocated between an employee&rsquo;s tax years. The cost allocated to the tax year in which the policy year begins is determined by multiplying the cost of the permanent benefit for the policy year, using the formula for determining cost, by the fraction of the annual premium paid during an employee&rsquo;s tax year. The balance of the cost, if any, is allocated to the next employee tax year. Each tax year the employee totals the costs of permanent benefits allocated to that year.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.79-1(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.79-0.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.79-1(d)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.79-1(d)(3).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.79-1(d)(4).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Under a group carve-out plan, an employer removes or carves-out one or more highly-compensated employees from the life insurance coverage provided by a group term life insurance policy under IRC Section 79. The carved-out employees are provided life insurance coverage through individual policies. Low term insurance rates on individual policies and lower minimum premiums on permanent policies contribute to the popularity of this type of plan. The portability of the individual policies also makes this arrangement attractive to highly-compensated executives who typically are selected to participate.<br /> <br /> Early in the development of the group carve-out plan, employees were provided coverage with individual policies that still were a part of the group insurance plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="241">241</a>). Currently, the purchase and ownership of individual life insurance policies often is structured in one of several ways, including a split dollar arrangement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4017">4017</a>), an IRC Section 162 bonus plan (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="272">272</a>), or a death benefit only arrangement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="101">101</a>).<br /> <br /> Under a group carve-out plan, the income tax consequences to both employer and carved-out employees are the same as if the alternative method of providing life insurance coverage existed independently of the group term plan. In a possible exception to this general rule, however, the IRS concluded in a technical advice memorandum released in 2000 that a split dollar arrangement entered into as part of a group carve-out plan should be taxed as group term life insurance. Thus, the economic benefit taxed to an employee was measured by Table&nbsp;I rates ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="246">246</a>) rather than the insurer&rsquo;s substitute rates that were used with the split dollar arrangement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4018">4018</a>).<a href="#_ftn1" name="_ftnref1">¹</a> Despite this, it seems almost universally accepted by practitioners that a group carve out plan structured as split dollar should be taxed as a split dollar plan and not as group term under the Table I rates.<br /> <br /> In deciding whether to adopt a carve-out arrangement, the fact that individual policy arrangements mentioned above generally do not afford an employer a deduction for policy premiums must be considered. The premiums for group term life insurance generally are deductible to an employer ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="245">245</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; TAM 200002047.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes, if each employee&rsquo;s right to the insurance on his or her life is non-forfeitable when the premiums are paid.<br /> <br /> If an employee has only a forfeitable right to the insurance, an employer cannot deduct premium payments.<br /> <br /> If an employee&rsquo;s rights change from forfeitable to non-forfeitable, an employer may deduct the fair market value of the policy in the employer&rsquo;s taxable year in which or with which ends the employee&rsquo;s tax year in which the employee&rsquo;s rights become non-forfeitable, and the fair market value ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="144">144</a>) of the policy is includable in the employee&rsquo;s gross income.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> An employee generally will be deemed to have properly included the amount as compensation in gross income if the employer satisfies the reporting requirements of IRC Section 6041 or IRC Section 6041A.<a href="#_ftn2" name="_ftnref2">²</a> Premiums paid after the employee&rsquo;s rights become non-forfeitable are deductible when paid.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 83(h); Treas. Reg. &sect; 1.83-6(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.83-6(a)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> The 2016 fiduciary standard was vacated entirely by the Fifth Circuit. &nbsp;As of the date of this publication, the DOL has released a new proposed standard to replace the 2016 rule. The proposal follows the basic concepts of the original rule, but, if finalized, is expected to greatly expand the scope of fiduciary liability. The most recent proposal is much broader than prior rules and would presumably apply to a wide range of transactions, including those involving life insurance.&nbsp; However, it remains uncertain exactly how this new standard will impact advisors who sell life and disability insurance. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3982">3982</a> for details.<br /> <br /> While advisors who provide advice relating to health savings accounts were to be covered by the Department of Labor&rsquo;s heightened fiduciary standard, certain related products, such as disability and term life insurance policies, were expressly excluded from the definition of investment property and were thus not subject to the fiduciary standard. This would have been the case to the extent that these products do not contain an investment component. As a result, presumably, permanent life insurance policies that did contain an investment component would have been subject to the DOL fiduciary rule.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; 29 CFR &sect;&nbsp;2510.3-21(g)(4).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes.<br /> <br /> Premiums paid by an employer for group term insurance on the lives of employees are deductible.<a href="#_ftn1" name="_ftnref1">¹</a> This is so even if a plan discriminates in favor of key employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="249">249</a>).<br /> <br /> A corporation may deduct premiums it pays for coverage on the lives of commission salespersons irrespective of whether an employer-employee relationship exists between the salesperson and the corporation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> No deduction will be allowed for the cost of coverage on the life of an employee if an employer is directly or indirectly a beneficiary under a policy.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If group term proceeds are to be used to fund a buy-sell agreement between stockholders of a corporation, the IRS may deny the corporation a business expense deduction for its premium payments ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="299">299</a>).<br /> <br /> Contributions will not be deductible unless, when considered with all an employee&rsquo;s other compensation, they are reasonable ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3519">3519</a>).<br /> <br /> Current deduction of contributions to a welfare benefit fund ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4090">4090</a>) to provide group life insurance to employees is strictly limited. Contributions to a welfare benefit fund to provide life insurance benefits to employees are subject to certain requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4092">4092</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 162(a); Rev. Rul. 56-400, 1956-2 CB 116.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 56-400, <em>supra</em>.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 264(a).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. The cost of group term life insurance that is includable in the gross income of the employee is considered wages subject to Social Security tax.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The general rule is that an employee may exclude the cost of the first $50,000 of employer-provided group term life insurance from income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="246">246</a>). Therefore, only the cost of coverage in excess of $50,000 generally will be subject to the Social Security tax.<br /> <br /> An employer is required to report amounts includable in the wages of current employees for purposes of the Social Security tax on employees&rsquo; W-2 forms. An employer generally may treat wages as though paid on any basis so long as they are treated as paid at least once each year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Social Security tax must be paid by an employee if a payment for group term life insurance is considered wages and is for periods during which there is no longer an employment relationship between the employer and the employee. An employer is required to separately state the portion of an employee&rsquo;s wages that consist of payments for group term life insurance and the amount of Social Security tax.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 3121(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Notice 88-82, 1988-2 CB 398.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 3102(d).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If an employee pays nothing toward the cost of permanent benefits, all dividends under a policy that actually are received or that are constructively received by an employee are includable in the employee&rsquo;s income.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If an employee pays a part or all of the cost of the permanent benefits, the amount of dividends includable by the employee is determined under this formula: (D + C) &ndash; (PI + DI + AP), where D equals the total dividends received by the employee in the employee&rsquo;s current and all preceding taxable years; C equals the total cost of permanent benefits for the employee&rsquo;s current and all preceding tax years, using the formula in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="254">254</a>; PI equals the total premium included in the employee&rsquo;s income under the formula in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="189">189</a> for the employee&rsquo;s current and all preceding tax years; DI equals the total amount of dividends included in the employee&rsquo;s income under the formula in this answer for all preceding tax years of the employee; and AP equals the total amount paid for the permanent benefits by the employee in the current and all preceding tax years of the employee.<a href="#_ftn2" name="_ftnref2">²</a> It appears that an employee who pays no more than allocated cost will be taxed under the formula on the amount of dividends the employee receives.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.79-1(d)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.79-1(d)(5).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes.<br /> <br /> Death proceeds received by individuals are wholly tax-exempt whether received from group permanent or group term insurance.<a href="#_ftn1" name="_ftnref1">¹</a> Where group term life insurance coverage is provided to domestic partners of employees by an employer, death proceeds paid on the death of a domestic partner are excluded from income under IRC Section 101.<a href="#_ftn2" name="_ftnref2">²</a> The same rules as are applicable to proceeds under individual policies generally apply ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="63">63</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="71">71</a>). Special rules apply if insurance is payable under a qualified pension or profit sharing plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3969">3969</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3970">3970</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a); Treas. Reg. &sect; 1.101-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9717018.<br /> <br /> </div></div><br />

<div class="Section1">Yes. Where a group life insurance policy provides permanent benefits but does not meet the requirements necessary for any part of the benefit to be treated as group term life insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="254">254</a>), an insured employee will be taxed as follows: premiums paid by an employer for insurance on the life of an employee generally will be includable in the insured employee&rsquo;s gross income if the proceeds of the insurance are payable to the beneficiary of the employee.<a href="#_ftn1" name="_ftnref1">¹</a> For the tax treatment of the cost of group permanent insurance under a qualified plan, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3943">3943</a>.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.61-2(d)(2)(ii).<br /> <br /> </div></div><br />