[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.79-1]
[Page 311-315]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Sec. 1.79-1 Group-term life insurance--general rules.
(a) What is group-term life insurance? Life insurance is not group-
term life insurance for purposes of section 79 unless it meets the
following conditions:
(1) It provides a general death benefit that is excludable from
gross income under section 101(a).
(2) It is provided to a group of employees.
[[Page 312]]
(3) It is provided under a policy carried directly or indirectly by
the employer.
(4) The amount of insurance provided to each employee is computed
under a formula that precludes individual selection. This formula must
be based on factors such as age, years of service, compensation, or
position. This condition may be satisfied even if the amount of
insurance provided is determined under a limited number of alternative
schedules that are based on the amount each employee elects to
contribute. However, the amount of insurance provided under each
schedule must be computed under a formula that precludes individual
selection.
(b) May group-term life insurance be combined with other benefits?
No part of the life insurance provided under a policy that provides a
permanent benefit is group-term life insurance unless--
(1) The policy or the employer designates in writing the part of the
death benefit provided to each employee that is group-term life
insurance; and
(2) The part of the death benefit that is provided to an employee
and designated as the group-term life insurance benefit for any policy
year is not less than the difference between the total death benefit
provided under the policy and the employee's deemed death benefit (DDB)
at the end of the policy year determined under paragraph (d)(3) of this
section.
(c) May a group include fewer than 10 employees? (1) As a general
rule, life insurance provided to a group of employees cannot qualify as
group-term life insurance for purposes of section 79 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. For purposes of
this rule, all life insurance provided under policies carried directly
or indirectly by the employer is taken into account in determining the
number of employees to whom life insurance is provided.
(2) The general rule of paragraph (c)(1) of this section does not
apply if the following conditions are met:
(i) The insurance is provided to all full-time employees of the
employer or, if evidence of insurability affects eligibility, to all
full-time employees who provide evidence of insurability satisfactory to
the insurer.
(ii) The amount of insurance provided is computed either as a
uniform percentage of compensation or on the basis of coverage brackets
established by the insurer. However, the amount computed under either
method may be reduced in the case of employees who do not provide
evidence of insurability satisfactory to the insurer. In general, no
bracket may exceed 2\1/2\ times the next lower bracket and the lowest
bracket must be at least 10 percent of the highest bracket. However, the
insurer may establish a separate schedule of coverage brackets for
employees who are over age 65, but no bracket in the over-65 schedule
may exceed 2\1/2\ times the next lower bracket and the lowest bracket in
the over-65 schedule must be at least 10 percent of the highest bracket
in the basic schedule.
(iii) Evidence of insurability affecting employee's eligibility for
insurance or the amount of insurance provided to that employee is
limited to a medical questionnaire completed by the employee that does
not require a physical examination.
(3) The general rule of paragraph (c)(1) of this section does not
apply if the following conditions are met:
(i) The insurance is provided under a common plan to the employees
of two or more unrelated employers.
(ii) The insurance is restricted to, but mandatory for, all
employees of the employer who belong to or are represented by an
organization (such as a union) that carries on substantial activities in
addition to obtaining insurance.
(iii) Evidence of insurability does not affect an employee's
eligibility for insurance or the amount of insurance provided to that
employee.
(4) For purposes of paragraph (c) (2) and (3) of this section,
employees are not taken into account if they are denied insurance for
the following reasons:
(i) They are not eligible for insurance under the terms of the
policy because they have not been employed for a waiting period,
specified in the policy, which does not exceed six months.
[[Page 313]]
(ii) They are part-time employees. Employees whose customary
employment is for not more than 20 hours in any week, or 5 months in any
calendar year, are presumed to be part-time employees.
(iii) They have reached the age of 65.
(5) For purposes of paragraph (c) (1) and (2) of this section,
insurance is considered to be provided to an employee who elects not to
receive insurance unless, in order to receive the insurance, the
employee is required to contribute to the cost of benefits other than
term life insurance. Thus, if an employee could receive term life
insurance by contributing to its cost, the employee is taken into
account in determining whether the insurance is provided to 10 or more
employees even if such employee elects not to receive the insurance.
However, an employee who must contribute to the cost of permanent
benefits to obtain term life insurance is not taken into account in
determining whether the term life insurance is provided to 10 or more
employees unless the term life insurance is actually provided to such
employee.
(d) How much must an employee receiving permanent benefits include
in income?--(1) In general. If an insurance policy that meets the
requirements of this section provides permanent benefits to an employee,
the cost of the permanent benefits reduced by the amount paid for
permanent benefits by the employee is included in the employee's income.
The cost of the permanent benefits is determined under the formula in
paragraph (d)(2) of this section.
(2) Formula for determining cost of the permanent benefits. In each
policy year the cost of the permanent benefits for any particular
employee must be no less than:
X(DDB2-DDB1)
where
DDB2 is the employee's deemed death benefit at the end of the
policy year:
DDB1 is the employee's deemed death benefit at the end of the
preceding policy year; and
X is the net single premium for insurance (the premium for one dollar of
paid-up whole-life insurance) at the employee's attained age at the
beginning of the policy year.
(3) Formula for determining deemed death benefit. The deemed death
benefit (DDB) at the end of any policy year for any particular employee
is equal to:
R/Y
where
R is the net level premium reserved at the end of that policy year for
all benefits provided to the employee by the policy or, if greater, the
cash value of the policy at the end of that policy year; and
Y is the net single premium for insurance (the premium for one dollar of
paid-up whole life insurance) at the employee's age at the end of that
policy year.
(4) Mortality tables and interest rates used. For purposes of
paragraph (d) (2) and (3) of this section, the net level premium reserve
(R) and the net single premium (X or Y) shall be based on the 1958 CSO
Mortality Table and 4 percent interest.
(5) Dividends. If an insurance policy that meets the requirements of
this section provides permanent benefits, part or all of the dividends
under the policy may be includible in the employee's income. If the
employee pays nothing for the permanent benefits, all dividends under
the policy that are actually or constructively received by the employee
are includible in the employee's income. In all other cases, the amount
of dividends included in the employee's income is equal to
(D+C)-(PI+DI+AP)
where
D is the total amount of dividends actually or constructively received
under the policy by the employee in the current and all preceding
taxable years of the employee;
C is the total cost of the permanent benefits for the current and all
preceding taxable years of the employee determined under the formulas in
paragraph (d) (2) and (6) of this section:
PI is the total amount of premium included in the employee's income
under paragraph (d)(1) of this section for the current and all preceding
taxable years of the employee;
DI is the total amount of dividends included in the employee's income
under this paragraph (d)(5) in all preceding taxable years of the
employee; and
AP is the total amount paid for permanent benefits by the employee in
the current and all preceding taxable years of the employee.
[[Page 314]]
(6) Different policy and taxable years. (i) If a policy year begins
in one employee taxable year and ends in another employee taxable year,
the cost of the permanent benefits, determined under the formula in
paragraph (d)(2) of this section, is allocated between the employee
taxable years.
(ii) The cost of permanent benefits for a policy year is allocated
first to the employee taxable year in which the policy year begins. The
cost of permanent benefits allocated to that policy year is equal to:
FxC
where
F is the fraction of the premium for that policy year that is paid on or
before the last day of the employee taxable year; and
C is the cost of permanent benefits for the policy year determined under
the formula in paragraph (d)(2) of this section.
(iii) Any part of the cost of permanent benefits that is not
allocated to the employee taxable year in which the policy year begins
is allocated to the subsequent employee taxable year.
(iv) The cost of permanent benefits for an employee taxable year is
the sum of the costs of permanent benefits allocated to that year under
paragraph (d)(6) (ii) and (iii) of this section.
(7) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. An employer provides insurance to employee A under a policy
that meets the requirements of this section. Under the policy, A, who is
47 years old, received $70,000 of group-term life insurance and elects
to receive a permanent benefit under the policy. A pays $2 for each
$1,000 of group-term life insurance through payroll deductions and the
employer pays the remainder of the premium for the group-term life
insurance. The employer also pays one half of the premium specified in
the policy for the permanent benefit. A pays the other half of the
premium for the permanent benefit through payroll deductions. The policy
specifies that the annual premium paid for the permanent benefit is
$300. However, the amount of premium allocated to the permanent benefit
by the formula in paragraph (d)(2) of this section is $350. A is a
calendar year taxpayer; the policy year begins January 1. In year 2000,
$200 is includible in A's income because of insurance provided by the
employer. This amount is computed as follows:
(1) Cost of permanent benefits................................ $350
(2) Amounts considered paid by A for permanent benefits (\1/2\ 150
x $300)......................................................
(3) Line (1) minus line (2)................................... 200
(4) Cost of $70,000 of group-term life insurance under Table I 126
of Sec. 1.79-3.............................................
(5) Cost of $50,000 of group-term life insurance under Table I 90
of Sec. 1.79-3.............................................
(6) Cost of group-term insurance in excess of $50,000 (line 36
(4) minus line(5))...........................................
(7) Amount considered paid by A for group-term life insurance 140
(70 x $2)....................................................
(8) Line (6) minus line (7) (but not less than 0)............. 0
(9) Amount includible in income (line (3) plus line (8))...... 200
(e) What is the effect of State law limits? Section 79 does not
apply to life insurance in excess of the limits under applicable state
law on the amount of life insurance that can be provided to an employee
under a single contract of group-term life insurance.
(f) Cross references. (1) See section 79(b) and Sec. 1.79-2 for
rules relating to group-term life insurance provided to certain retired
individuals.
(2) See section 61(a) and the regulations thereunder for rules
relating to life insurance not meeting the requirements of section 79,
this section, or Sec. 1.79-2, such as insurance provided on the life of
a non-employee (for example, an employee's spouse), insurance not
provided as compensation for personal services performed as an employee,
insurance not provided under a policy carried directly or indirectly by
the employer, or permanent benefits.
(3) See sections 106 and Sec. 1.106-1 for rules relating to certain
insurance that does not provide general death benefits, such as travel
insurance or accident and health insurance (including amounts payable
under a double indemnity clause or rider).
(g) [Reserved]
(h) Effective date. Section 1.79-0 applies to insurance provided in
employee taxable years beginning on or after January 1, 1977 (except as
provided in 26 CFR 1.79-1(g) (revised as of April 1, 1983) with respect
to insurance provided in employee taxable years beginning in 1977).
Sections 1.79-1 through 1.79-3 apply to insurance provided in employee
taxable years beginning after December 31, 1982. See 26 CFR 1.79-1
through 1.79-3 (revised as of April 1, 1983) for rules applicable to
insurance
[[Page 315]]
provided in employee taxable years beginning before January 1, 1983.
(Secs. 79(c) and 7805 of the Internal Revenue Code of 1954 (78 Stat. 36,
26 U.S.C. 79(c); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7623, 44 FR 28797, May 17, 1979, as amended by T.D. 7917, 48 FR
45762, Oct. 7, 1983; T.D. 7924, 48 FR 54595, Dec. 6, 1983; T.D. 8821, 64
FR 29790, June 3, 1999]