1. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Life insurance provided to a group of employees under a group insurance contract held by the employer If plan qualifies under IRS Code Sec. 79, the cost of the first $50,000 of insurance is tax-free to employees What is it?

2. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? Virtually all employees have need of basic life insurance Tax advantage for first $50,000 coverage makes it a common employee benefit, at least to that face value Group-term plans may also provide cost-effective life insurance coverage in amounts above $50,000

3. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Design Features: Nondiscrimination Requirements Sec. 79 prescribes rules to prevent discrimination in favor of key employees (as defined in IRC) Nondiscrimination requirements do not apply to plans of churches, synagogues, or certain related organizations If rules are not met, key employees lose tax advantage on first $50,000 of coverage

4. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Design Features: Coverage Rules Plan must –benefit at least 70% of all employees –benefit a group of which at least 85% are not key employees –benefit a nondiscriminatory classification of employees –meet Sec. 125 nondiscrimination rules if in a cafeteria plan

5. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Design Features: Benefit Rules Benefits must not discriminate in favor of key employees All benefits available to key employees must be available to other plan participants If life insurance coverage is same % of compensation for all employees will not violate benefit nondiscrimination rule

6. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Design Features: Who Can Be Excluded Employees who have not completed 3 years of service Part-time or seasonal employees Employees who are part of a collective bargaining unit that has engaged in good faith bargaining on issue of death benefits

7. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Requirements of Section 79 Regulations To obtain the $50,000 exclusion, policy must –provide a general death benefit –be provided to group of employees as compensation for services –be carried directly or indirectly by employer –determine insurance amounts by formula that precludes individual selection

8. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Group Life Insurance Carve-Out for Executives Concept –Executives may be able to obtain better coverage if removed from employee group covered by a group-term life contract

9. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Group Life Insurance Carve-Out for Executives Advantages of carve-out coverage over group-term –Executives can have more coverage than provided under group-term plan –Plan can provide portable cash growth –Cost to employer can be favorable –Carve-out can save an otherwise discriminatory plan

10. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Group Life Insurance Carve-Out for Executives How to structure the carve-out coverage –All methods used to finance executive life insurance are generally available for carved-out benefits - bonus or Sec. 162 plans - split dollar plans - death benefit only plans –Design plan to avoid designation as Sec. 79 status

11. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Tax Implications 1.Cost of first $50,000 of coverage is tax-free to employee 2.Employer paid premium for additional insurance is treated as taxable income to employee using Table I rates 3.Tax-free death benefit to beneficiary 4.Employer can deduct premiums paid as business expense

12. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Tax Implications 5.Employer can deduct premiums paid as business expense 6.Employer must pay employment taxes on extra compensation that employee includes in income as result of plan coverage over $50,000 or as result of compliance with nondiscrimination rules

13. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 ERISA and Other Requirements Group-term life insurance is a “welfare benefit plan” and subject to all applicable ERISA requirements

14. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Alternatives 1.Life insurance in a qualified plan 2.Split dollar life insurance 3.Death benefit only (employer death benefit) 4.Personally owned insurance

15. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 True or False? 1.All premiums for group term life insurance are tax free to the employee. 2.When applying the percentage tests, all employees must be included. 3.A carve-out plan allows an employer to treat highly compensated employees differently than rank-and- file employees.

16. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 True or False? 4.When an employer pays the premiums, life insurance beneficiaries must pay a tax when death benefits are received. 5.The employer can deduct premiums paid for employee group-term life as a business expense. 6.All employer-paid premiums are treated as income for the employee and subject to FICA and FUTA tax.

17. Group-Term Life Insurance Chapter 41 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Discussion Question To what extent can group-term insurance be used to meet insurance needs of select groups, for example: –self-employed persons –S corporation shareholders –employee group smaller than 10 employees –persons needing a permanent insurance benefit –persons desiring group universal life