A group term life plan must meet the following requirements under Code section 79. Life insurance can provide permanent protection as well as term and still receive the favorable tax treatment afforded to group term if certain requirements are met. Such insurance has come to be called “Section 79” insurance.
The requirements that must be met are:
- the policy itself, or the employer under a separate document, must state the portion of the death benefit that is group term coverage; and
- the portion of the death benefit generated by the group term life portion of the coverage must not be less than the difference between the total death benefit provided under the policy and the employee’s deemed death benefit at the end of the policy year.
A Section 79 plan is one designed to solve some of the problems inherent in any term vehicle and yet retain some of the cost advantages of group coverage. Group term insurance builds no cash values to keep premiums paid after the covered employee retires. Furthermore, there are no paid-up policy values to carry the coverage into the postretirement period. So generally, when the employee retires, the coverage terminates (although some employers provide a reduced amount of coverage).
The Section 79 plan employs a permanent product designed to provide tax-favored, postretirement insurance coverage. Specifically, it is group life insurance that provides a combination of both term and permanent insurance under a master contract, under separate policies, or under a combination of the two. Alternatively, a Section 79 plan may be superimposed on an existing plan of group term life insurance that covers more than ten employees.
Additional requirements include:
- The plan must provide a death benefit that meets the definition of a life insurance contract.
- The plan’s benefits must be provided to a group of employees as compensation for services.
- Benefits must be provided under a policy carried directly or indirectly by the employer.
- The amount of insurance provided to each employee must be computed under a formula that precludes individual selection.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM