However, most employers do not do this. Those that do not should consider, even before the beginning of the plan year, whether their plan design will likely pass the eligibility and benefits tests based on their demographics and that of other members of their controlled group. Instead, they will have the greater of either the actual cost of all their employer-provided coverage or the Table I rates for that coverage included in their income coverage paid for by the employee on an after-tax basis is not taken into account.
Non-key employees will still qualify for all tax advantages applicable to the benefit. The IRS has stated that an employer may treat the imputed income amounts as paid either by the pay period, by the quarter, or on any other basis so long as the amounts are treated as paid at least as often as once a year. The benefits provided under the plan may not discriminate in favor of key employees. Satisfaction of the requirements must be demonstrated through testing.
The Prohibited Group Unlike other nondiscrimination tests, highly compensated individuals are not included in the prohibited group. Excludable Employees Section 79 permits the following employees to be disregarded in determining whether group term life insurance coverage satisfies the eligibility test: Collectively bargained employees who are not eligible to participate in the plan, if benefits were the subject to good faith collective bargaining Employees who have not completed three years of service at the beginning of the plan year Part-time employee or seasonal employees Nonresident aliens with no U.
Eligibility Test To satisfy the Section 79 eligibility test, the group term life insurance coverage must satisfy one of the following: Cafeteria plan eligibility test — If group term life insurance coverage is offered through a cafeteria plan that satisfies the cafeteria plan eligibility test, the coverage satisfies the Section 79 eligibility test.
Nondiscriminatory classification test — Under this test, the plan must benefit a classification of employees that does not discriminate in favor of key employees. Benefits Test The purpose of the benefits test is to confirm that benefits are not available to key employees on more favorable terms than to other employees. When to Run the Tests Section 79 does not specify when the nondiscrimination tests should be run. In Closing Employers need to be aware of the Section 79 non-discrimination tests and act to ensure that: All employers in the controlled group are included in testing, Both the eligibility and benefits tests are satisfied, and Testing is completed before the end of the plan year.
Related Insights. Read more : IRS announces some benefit plan limits Opens in new tab. A A group -term life insurance plan of the employer was in existence on January 1, , only if the group policy or policies providing group -term life insurance benefits under the plan were executed on or before January 1, , and were not terminated prior to such date.
These individuals consist of those persons who are covered under a plan of group -term life insurance of the employer that was in existence on January 1, , or a comparable successor to such a plan maintained by the employer or a successor employer , and who either retired on or before January 1, , or who both attained age 55 on or before January 1, , and were employed by the employer maintaining the plan or a predecessor of that employer during the year Accordingly, if significant additional or reduced benefits are provided only to individuals who are not described in the preceding sentence, the plan will be considered a comparable successor plan.
A plan will not fail to be a comparable successor plan merely because the employer purchases a policy or policies identical to the employer 's first plan from a different insurance company.
If the new plan provides significant additional or reduced benefits either as to the type or amount available to employees , or provides benefits to a category of employees that was formerly excluded from participating in the plan , the plan is generally not a comparable successor to the first plan. However, a plan will not be considered as providing significant additional or reduced benefits merely because a participant 's coverage is based on a percentage of compensation and the participant 's compensation for the taxable year has been increased or decreased.
Furthermore, a plan will not be considered a non-comparable successor plan merely because it is amended, either to decrease benefits provided to key employees or to increase benefits provided to non-key employees , solely in order to comply with the nondiscrimination requirements of section 79 d. Finally, a plan will not be considered a non-comparable successor plan merely because a policy that is part of a discriminatory plan is terminated in order to end discriminatory coverage.
A A successor employer is an employer who employs a group of individuals formerly employed by another employer as a result of a business merger, acquisition or division.
Q Under what circumstances will separate policies of group -term life insurance of an employer be considered to be a single plan in determining whether the employer 's plan of group -term life insurance is discriminatory? If it is discriminatory, the key employees covered by either policy will not receive the benefit of section 79 a 1 or section 79 c for either policy.
The result is the same even if each policy , considered alone, would be nondiscriminatory. A policy that provides group -term life insurance to a key employee and a policy under which the same key employee is eligible to receive group -term life insurance upon separation from service will be considered to provide group -term life insurance to a common key employee. In addition, an employer may treat two or more policies that do not provide group -term life insurance to a common key employee as constituting a single plan for purposes of satisfying the nondiscrimination provisions of section 79 d.
For example , if the employer provides group -term life insurance coverage for non-key employees under one policy and provides group -term life insurance coverage for key employees under a second policy , the two policies may be considered together in determining whether the requirements of section 79 d are satisfied with regard to the second policy. Q In the case of a discriminatory group -term life insurance plan , what amounts should be included in the gross income of a key employee?
A a In the case of a discriminatory group -term life insurance plan , each key employee must include in gross income for the taxable year the cost of his or her insurance benefit for that year provided by the employer under the plan. In the event that the employer has other forms and types of coverage with the same insurer, the employer must make a reasonable allocation of the total premiums paid to the insurer.
For example , where an employer has both health insurance coverage and a plan of group -term life insurance with the same insurer, and there is no volume discount, the net premium for the plan of group -term life insurance must include the excess, if any, of the payments the employer makes for the health insurance coverage over the payments the employer would make for such coverage if the plan of group -term life insurance for which this calculation is being made did not exist.
For these purposes the table used to calculate tabular premiums will be determined as follows:. The employer pays nothing toward the cost. Therefore there is no taxable income to the employees. It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees. Generally, if there is more than one policy from the same insurer providing coverage to employees, a combined test is used to determine whether it is carried directly or indirectly by the employer.
However, the Regulations provide exceptions that allow the policies to be tested separately if the costs and coverage can be clearly allocated between the two policies. See Regulation 1. If coverage is provided by more than one insurer, each policy must be tested separately to determine whether it is carried directly or indirectly by the employer. This coverage is excluded as a de minimis fringe benefit.
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