Section 79 Plan

Section 79 of the Internal Revenue Code

Internal Revenue Code

The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

 http://www.fourmilab.ch/ustax/www/t26-A-1-B-II-79.html details the tax consequences and requirements for corporations wishing to install a Group-term life insurance

Life insurance

Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...

 plan. Permanent life insurance

Permanent life insurance

Permanent life insurance is a form of life insurance such as whole life or endowment, where the policy is for the life of the insured, the payout is assured at the end of the policy and the policy accrues cash value....

 may also be offered as an added benefit in a Section 79 plan. Section 79 plans are non-qualified as defined by the Internal Revenue Code, but still offer a tax deduction

Tax deduction

Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...

 for sponsoring employers. http://investopedia.com/ask/answers/206.asp

Employees participating in a Section 79 plan offered by a sponsoring corporation may receive up to $50,000 in group term life

Term life insurance

Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or...

 insurance at no cost, if the plan is non-discriminatory. Any amount over this limit is deemed a 'permanent benefit'. The employee should realize a portion of the permanent benefit as W-2 taxable income

Taxable income

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...

, and pay any applicable taxes accordingly. Contributions to a Section 79 plan are tax-deductible, though for owner(s), and 2% or more shareholde rs, contributions are only deductible if paid by, and from, a C Corporation

C corporation

C corporation refers to any corporation that, under United States income tax law, is taxed separately from its owners. It is distinguished from an S corporation, which is not taxed separately. Most major companies are treated as C corporations for U.S. income tax purposes.-C corporation vs...

.
Although the available number of insurance companies that sell a Section 79 permanent product may be limited, a Section 79 Benefit Program may allow the following benefits.
1. The ability to purchase permanent life insurance with Corporate dollars.
2. Deduct 100% of the cost to the C Corporation as a business expense.*
3. Allow the transfer of corporate dollars to the business owner on a "tax favored" basis.**
4. Grow the money in the plan in a tax-deferred setting
5. Access to money in the plan can be achieved through policy loans on a tax-deferred basis
6. Death benefits can pass to heirs on an income tax-free basis.
7. There are no regulatory limits on funding for the key participants
8. May provide asset protection by removing plan assets from the reach of company creditors
9. Provides for minimal rank and file employee cost
10. Insurance cash values may provide tax-free income as long as the policy is kept in force and withdrawals do not exceed the cost basis

• policy loans and withdrawals reduce the policies cash value and death benefit and may result in a taxable event
  • although 100% deductible at the corporate level, contributions to a section 79 plan also provide an economic benefit to the owner and income tax will be required on approximately 60% of the contribution.

A section 79 plan may be used for the following applications.
1. Group life insurance benefits
2. Deductible insurance to fund estate planning needs of the business owner
3. Deductible insurance to provide personal life insurance needs for the owner
4. Deductible insurance to fund a buy-sell agreement or key man policy.
5. Future business buyout on a tax-advantaged basis.

Determining the Death Benefit

Death benefits can be determined by a number of different methods at the discretion of the employee: from a minimum coverage of group term insurance to a permanent benefit up to a pre-determined multiple of the employee's reported W-2 income. The tax consequences and funding commitment to the employee will be impacted by the option they choose within the plan. In the case of an employee making $245,000, if a 10x multiple is used that employee will receive a death benefit equal to $2,450,000 ($245,000 x 10). The resulting contribution depends heavily on what product is being used for funding, as well as the employee's age and health.

Calculating the Tax Liability

In a non-discriminatory Section 79 plan the first $50,000 of coverage is provided free to all employees. Any group coverage over this amount is deemed a benefit for which the employee must pay. The pure insurance portion is factored using the IRS's published Table I rates http://www.irs.gov/pub/irs-irbs/irb99-25.pdf (scroll to page 5). If using permanent insurance the portion calculated as the 'permanent benefit' takes into account premium(s) paid, accumulated and cash surrender value

Cash value

The cash value of an insurance contract, also called the cash surrender value or surrender value, is the cash amount offered to the policyowner by the issuing life carrier upon cancellation of the contract...

, and other policy factors http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A%2C_Sec._1.79-1.

Requirements

There are generally 4 main conditions which must be met when installing a Section 79 plan:

1. The plan must provide a death benefit excludable from income under Code section 101(a)http://www.fourmilab.ch/ustax/www/t26-A-1-B-III-101.html
2. Must be provided to a group of employees
3. Must be provided under a policy carried directly or indirectly by the employer
4. Death benefits for each employee based on a multiple of compensation

Non-discriminatory

In order for a Section 79 plan to maintain it's non-discriminatory form other conditions must be met:

1. Cover at least 70% of employees
2. No more than 15% of the participants are key employees
3. Benefits based on reasonable classifications

Discriminatory

It is possible to have what is deemed a discriminatory Section 79 plan. Under a discriminatory plan the first $50,000 of death benefit coverage is not free for owners and key employees. Cost will again be based on the IRS Table I rates. Rank and file employees maintain their free benefit whether or not the plan is discriminatory.

Yet another set of requirements comes into play if the company has less than 10 employees.

Under 10 Employees

Employees must have six months of full-time employment to be eligible for the plan

1. Benefits must be based on a uniform percentage of compensation or coverage brackets, such that no bracket is more than 2.5 times the next lowest bracket and the lowest bracket is at least 10% of the highest bracket

Excluded employees

Employees under the age of 18 or over the age of 64,
Part-time or seasonal employees
Employees covered under a union contract [provided the group term life insurance benefits were the subject of good faith bargaining]
Anyone not medically approved,
Anyone choosing to opt out

Coverage for Spouses and Dependents

The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the fa ce amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.
Some cases may allow more - see notice 89-110
http://www.irs.gov/govt/fslg/article/0,,id=110345,00.html