Internal Revenue Code section 79

Section 79 Plan

Section 79 of the Internal Revenue Code [1] details the tax consequences and requirements for corporations wishing to install a Group-term life insurance plan. Permanent life insurance may also be offered as an added benefit in a Section 79 plan. Section 79 plans are non-qualified as defined by the Internal Revenue Code, but still offer a tax deduction for sponsoring employers. [2]

Summary

Employees participating in a Section 79 plan offered by a sponsoring corporation may receive up to $50,000 in group term life insurance at no cost, if the plan is non-discriminatory. Any amount over this limit is deemed a 'permanent benefit'. The employee should realize a portion of the permanent benefit as W-2 taxable income, and pay any applicable taxes accordingly. Contributions to a Section 79 plan are tax-deductible, though for owner(s), and 2% or more shareholders, contributions are only deductible if paid by, and from, a C Corporation.

Determining the Death Benefit

Death benefits are determined by using a multiple of salary. In the case of an employee making $245,000, if a 10x multiple is used that employee will receive a death benefit equal to $2,450,000 ($245,000 x 10). The resulting contribution depends heavily on what product is being used for funding, as well as the employee's age and health.

Calculating the Tax Liability

In a non-discriminatory Section 79 plan the first $50,000 of coverage is provided free to all employees. Any group coverage over this amount is deemed a benefit for which the employee must pay. The pure insurance portion is factored using the IRS's published Table I rates [3] (scroll to page 5). If using permanent insurance the portion calculated as the 'permanent benefit' takes into account premium(s) paid, accumulated and cash surrender value, and other policy factors[4].

Requirements

There are generally 4 main conditions which must be met when installing a Section 79 plan:

1. The plan must provide a death benefit excludable from income under Code section 101(a)[5]
2. Must be provided to a group of employees
3. Must be provided under a policy carried directly or indirectly by the employer
4. Death benefits for each employee based on a multiple of compensation

Non-discriminatory

In order for a Section 79 plan to maintain it's non-discriminatory form other conditions must be met:

1. Cover at least 70% of employees
2. No more than 15% of the participants are key employees
3. Benefits based on reasonable classifications

Discriminatory

It is possible to have what is deemed a discriminatory Section 79 plan. Under a discriminatory plan the first $50,000 of death benefit coverage is not free for owners and key employees. Cost will again be based on the IRS Table I rates. Rank and file employees maintain their free benefit whether or not the plan is discriminatory.

Yet another set of requirements comes into play if the company has less than 10 employees.

Under 10 Employees

1. Cannot use more than a 6-month waiting period
2. No medical underwriting inside the plan
3. Benefits must be based on a uniform percentage of compensation or coverage brackets, such that no bracket is more than 2.5 times the next lowest bracket and the lowest bracket is at least 10% of the highest bracket

References

• The Group Life Insurance Handbook, Darlene K. Chandler, J.D., CLU, ChFC, The National Underwriter Company, 1997
• Planning for Business Owners and Professionals, Ted Kurlowicz, James Ivers III, John J. McFadden, The American College, 2003