Section 79 – Employee-Paid Term Life • April 2017

Voluntary term life can be subject to tax.
Most people, when they hear “Section 79,” equate it to a tax on certain employer paid life insurance plans. Few realize that there are times when an employee-paid life insurance policy could be subject to these taxes as well.

Small tax now or large tax later. If an employee does not pay tax on the cost of life insurance when required, the life insurance proceeds will become taxable to the recipient. Paying the tax on the premium is peanuts compared to having to pay tax on the actual life insurance payout.

Section 79
This section of the Internal Revenue Code outlines which group term life plans are subject to income taxation.  This income tax applies to employer-paid life plans in excess of $50,000 for employees, those offering more than $2,000 in benefits for dependents, or discriminatory plans.   But few people realize that voluntary life plans, paid for by the employee, can be subject to Section 79 taxation as well.

Imputed Income
Life insurance coverage treated as income for tax purposes is called “imputed income.”  The imputed income for each employee is based on the employee’s age at the end of the calendar year and the amount of coverage to be imputed.

First Things First
Before we get started, we need to talk about ALL your group-based life insurance policies.  Section 79 allows the first $50,000 of coverage to be tax-free, as long as the plan does not discriminate in favor of Key Employees.  This $50,000 exemption can only be used once per year – so if an employee has more than one policy, the total value of all coverage needs to be aggregated together for Section 79 tax purposes.

Pre-tax vs Post-tax
The quickest way to a required imputed income on employee-paid life coverage is having the employee pay the premiums pre-tax.  Just don’t do it. Have employees pay for their voluntary coverage with post-tax dollars. Yes, technically you can have employees pay for the first $50,000 with pre-tax dollars (or less, if you also provide them with some coverage).  But why put yourself through that kind of hassle to save a few dollars annually?

The Lesser Known Rule
Now we get to the fun stuff – the little intricacies that the IRS loves to include in their rules. Imputed income will need to be calculated for any employees whose voluntary life insurance premiums, per $1000, are less than the Section 79 Table 1 rates. Yes, you heard me right. Pull out your voluntary life rates and make sure all the rates are equal to or more than the Table 1 rates. If they are, you’re done. If not, read on. There is math in your future.

We’ll walk you through an example.
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Let’s assume:

  • Your company provides a flat $50,000 in coverage
  • Drew, age 41, elects an additional $100,000.
  • The voluntary life rate for age 40-44 is $0.08.

Drew’s monthly imputed income will be the value of the coverage over $50,000, times the difference in the Table 1 rate and his actual rate, divided by $1000 (since rates are per $1000).

($150,000 – $50,000) x ($0.10 – $0.08) / $1000 = $2.00

Yes, after all that, Drew will have an extra $2.00 included in his monthly income for tax purposes.

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This article is provided for informational purposes only. Please contact your attorney and/or accountant to determine if this information may affect your business. © 2015 GHB Insurance

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