Providing employee life insurance that qualifies as group-term life insurance.

• Author: Ellentuck, Albert B.
• Position: Taxation; case study

Editor:

Albert B. Ellentuck, Esq. Of Counsel King and Nordlinger, L.L.P. Washington, DC

Facts: Pottery, Inc. is owned equally by Laurie Peters and Sandy Simon. There are seven employees, including Laurie and Sandy. The corporation has operated at a profit for the last three years. Laurie and Sandy feel the corporation's success is due in large part to the efforts of their employees. Therefore, they have decided to provide a fringe benefit for the employees, but only if the corporation can deduct the benefit for all employees beginning Jan. 1, 1999, including the shareholders. Laurie and Sandy discussed several benefits with the employees, who indicated they preferred life insurance, but only if it could be provided to them tax-free. Laurie and Sandy have met with the corporation's insurance agent to determine the amount of life insurance coverage the corporation can afford. The following coverage amounts are based on 150% of each employee's compensation.

Employee Coverage Age Laurie $80,000 42 Sandy 78,000 38 Pamela 60,000 34 James 45,000 28 Hillary 52,000 33 Cynthia 32,000 26 Curtis 55,000 39 Issue: How can the corporation deduct tax-free life insurance coverage provided for its employees?

Analysis

The tax adviser should consider whether the proposal submitted by the insurance agent would qualify as group-term life insurance. If it does, the corporation can deduct the life insurance and the employees can exclude it from income under Sec. 79.

To qualify as group-term life insurance, a plan must meet four requirements. Insurance provided by Pottery, Inc. for its employees would meet three of the four requirements:

1. It would be provided under a policy owned by the employer.

2. The death benefits provided under the policy would qualify for exclusion from income.

3. Individual selection of coverage amounts would be precluded, because the amount of coverage provided for each employee would be based on compensation.

   The fourth requirement for qualification as group-term life insurance is that a plan be provided for a group of employees. Generally, to qualify as group-term life insurance, a policy must cover 10 or more full-time employees. However, even if a policy covers fewer than 10 employees, it can still qualify as group-term life insurance if all of the following requirements are met:

1. 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...