Why is this Topic Important to Wealth Managers? Discusses group term life insurance policies in general. Provides a useful tool for client business planning when evaluating group term policy options. Also provides links to additional resources and materials to answer all your group term life insurance questions.
Generally, an employer may provide employees with up to $50,000 of group term life insurance protection each year without cost to employees. However, the exclusion is not available unless the insurance provided under the plan satisfies the definition of “group term life insurance”.
When life insurance provided by an employer meets the following requirements it may qualify as group term life insurance providing special tax exclusion by employees.The life insurance must meet four conditions to meet the definition of group life insurance under the code:
(1) It must provide a general death benefit, excludable from gross income under IRC Section 101(a). Under the regulations, travel insurance and accident and health insurance (including amounts payable under a double indemnity clause rider) do not provide a general death benefit. Employer contributions for such benefits are contributions to a health plan under IRC Section 106 instead of section 79.
(2) It must be provided to a group of employees as compensation for personal services performed as an employee. A group of employees is all employees of an employer, or fewer than all if membership in the group is determined solely on the basis of age, marital status, or factors related to employment such as membership in a union, duties performed, compensation received and length of service.
As a general rule, life insurance provided to a group cannot qualify as group term life insurance for income tax purposes 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 of the employer.
However, insurance for fewer than 10 employees may also qualify as group term life insurance if: (1) it is provided for all full-time employees; and (2) the amount of protection is computed either as a uniform percentage of compensation or on the basis of coverage brackets established by the insurer under which no bracket exceeds 2½ times the next lower bracket and the lowest bracket is at least 10% of the highest bracket; eligibility and amount of coverage may be based on evidence of insurability but determined solely on the basis of a medical questionnaire completed by the employee and not requiring a physical examination.
(3) The insurance must be provided under a policy carried directly or indirectly by the employer. A policy meets this requirement generally if the employer pays any part of the cost (directly or through another person). The policy can be a master policy or a group of individual policies.
(4) The amount of insurance provided each employee must be computed under a formula that precludes individual selection of such amounts. The formula must be based on factors such as age, years of service, compensation or position. This requirement may be satisfied even if the amount of insurance provided is determined under alternative schedules based on the amount each employee elects to contribute. However, the amount of insurance under each schedule must be computed under a formula that precludes individual selection.
For more information on this topic see AdvisorFYI: Group-Term Life Policy Tax Consequences.
For a detailed discussion on group term life insurance see TaxFacts: Group Term Insurance.
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IRC Sec. 79.
 Treas. Reg. §1.79-1(a).
 Treas. Reg. §1.79-1(f)(3).
 Treas. Reg. §1.79-1(c).