Section 79 Plans: January 2014

Wednesday, January 8, 2014

WHAT IS A SECTION 79 PLAN?

Section 79 plans are commonly known for the $50,000 free term life insurance they can provide for employees. Less commonly known is that Section 79 plans can also provide permanent life insurance. These plans are employee benefit plans established under Section 79 of the Internal Revenue Code. Section 79 plans are non-qualified plans but they are tax-deductible plans for the adopting employer.

WHAT ARE THE BENEFITS OF A SECTION 79 PLAN?

Section 79 plans provide life insurance benefits for employees paid for by the employer. The life premiums paid are 100% tax-deductible to the business. The "economic benefit" of the life insurance is reportable as taxable income for the insured employee. Only life insurance in excess of $50,000 is reportable. The "economic benefit" is determined using the rates under Table I ( Reg. §1.79-3(d)(2)). When permanent insurance is used the reportable economic benefit can be as little as 60% of the actual premium paid and deducted. This can provide a tax-advantaged way to purchase personal life insurance.

CAN ANY BUSINESS ADOPT A SECTION 79 PLAN?

Section 79 plans are only for employees. Self-employed individuals, partners and owners of S corporations are not employees. For an owner to participate the sponsoring employer must be a C Corporation.

MUST EVERY EMPLOYEE BE INCLUDED IN THE PLAN?

Non-discrimination rules do apply. 70% of all full time employees must benefit, or 85% of participants must be non-key employees. All participants must be offered the same type and amount of benefits. Special rules apply for companies with less than ten employees.

WHAT OPTIONS ARE TYPICALLY OFFERED IN A SECTION 79 PLAN THAT INCLUDES PERMANENT INSURANCE?

Typically, employees are offered three options. (1) Permanent life insurance with a death benefit that is a multiple of salary, (2) term insurance with a death benefit that is a multiple of salary, and (3) $50,000 group term insurance. The multiple of salary offered is usually defined by how much insurance the business owner wants for him or herself. Everyone will be offered the same multiple of salary. Option 1, permanent insurance, will produce the largest reportable economic benefit added to the taxable income of the employee, Option 2 will provide a significantly lower reportable economic benefit added to the taxable income of the employee, and Option 3 will result in no economic benefit added to the employee's taxable income.

These plans are sold so insurance agents can make commissions.