PLR 1350032: association life insurance programs are separate from the employer's basic coverage

Plain-English summary

The ruling addresses an employer whose employees and retirees could buy supplemental group-term life insurance through an employee association. The IRS concludes that the association's policies may be treated as separate from the employer's basic life insurance if premiums are properly allocated, the programs are actuarially independent, and there are no cross-subsidies or transferred dividends. Under those conditions, the supplemental employee coverage is not treated as provided under a policy carried directly or indirectly by the employer, so no income is imputed under IRC § 79 to employees who buy it. Spouse and child coverage paid entirely by members on an after-tax basis is also not included in employees' income, subject to the association receiving a determination that it is a qualified VEBA.

Ruling snapshot

• Question: How are association-provided supplemental and dependent group-term life insurance programs treated for employees' income?
• Outcome: Approved
• Key authorities: IRC §§ 61, 79, 501(c)(9); Treas. Reg. §§ 1.79-0, 1.79-1(a)(3), 1.79-3(d)(2), 1.61-2(d)(2)(ii)(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201350032 Third Party Communication: None
Release Date: 12/13/2013 Date of Communication: Not Applicable
Index Numbers: 61.53-00, 79.00-00
Person To Contact:
-------------------, ID No. --------------
Telephone Number:
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Refer Reply To:
----------------------- CC:TEGE:EB:HW
--------------------------- PLR-152054-12
---------------- Date:
---------------------------------- September 09, 2013

LEGEND:

Taxpayer = ----------------------------------
---------------

Association = ----------------------------------
----------------

Location M = --------------------------

$x = ----------------------------------
----------------------------------
$y = ----------------------------------
----------------------------------
$z = ----------------------------------

:
Dear ----------------:

This is in response to a request submitted on behalf of the Taxpayer by its authorized
representatives. The Taxpayer is asking for rulings regarding the federal income tax
consequences of offering to Taxpayer’s employees and retirees, through the
Association, group term life insurance coverage on the lives of the employees and
retirees, as well as on the lives of the spouses and dependents of the employees and
retirees.

The Taxpayer provides its employees and retirees basic group term life insurance on
the life of the employee or retiree. The basic coverage is provided at no cost to the
employees and retirees. For most of the employees, this coverage is the greater of $x
PLR-152054-12 2

or one times the employee’s basic annual earnings with basic annual earning rounded
to the next higher $y. For employees at the Taxpayer’s operations at Location M, the
basic group coverage is the greater of $x or two times the employee’s basic annual
earnings with basic annual earning rounded to the next higher $y. The Taxpayer also
provides each employee, upon retirement, no-cost life insurance coverage of $z.

In addition to the basic insurance, the Taxpayer’s employees can purchase
supplemental group-term life insurance on the life of the employee and, with the
exception of employees in Location M, group term life insurance on the lives of an
employee’s spouse and dependents. All of the supplemental insurance is purchased by
the employees on an after-tax basis from an insurance company pursuant to contracts
negotiated by the Association.

The Association, open to all of the Taxpayer’s regular employees, provides group term
life insurance benefits and other benefit programs to its members. A letter from the IRS
is being obtained, determining that the Association is a voluntary employees’ beneficiary
association qualified under section 501(c)(9) of the Internal Revenue Code (the Code).

Members of the Association generally can elect to purchase one, two, three, four, or five
times the amount of basic Taxpayer-provided life insurance coverage on the life of the
employee. The cost of the insurance for these members is a fixed amount per $1,000
of coverage, which is higher for smokers than for non-smokers.

Members of the Association in Location M can purchase life insurance coverage on the
life of the employee based on 100% or 200% of the employees’ basic annual earnings.
The cost of the insurance for members in Location M is a fixed amount per $1,000 of
coverage, but is a different amount than the cost charged to members in other locations.

Retirees generally can elect to purchase an amount not exceeding the active insurance
on the life of the employee (i.e., basic plus supplemental life insurance) in effect at the
time of retirement, with a minimum election of $y. Depending on a retiree’s age,
adjustments are made in the coverage that can be elected by the retiree. The rates
charged per $1,000 for retirees are age-weighted.

Members of the Association can also elect to purchase various optional amounts of life
insurance on the lives of an employee’s spouse and children. The Association charges
flat rates for this insurance, depending on the option selected.

The Association members pay for the life insurance purchased from the Association
through payroll deduction from their salaries. To maintain the desired independence
from the Taxpayer, the Taxpayer’s involvement with the Association’s life insurance
programs is limited to providing administrative services as an independent contractor.
The Association has agreed to this arrangement since it is more economical and
PLR-152054-12 3

efficient for the operation of its life insurance programs to have the Taxpayer perform
such services.

In addition to collecting the employees’ payments of insurance premiums through
payroll deductions and remitting them to the Association, the Association arranges for
the Taxpayer to add sections in its employee benefit handbooks describing the
Association’s insurance programs; enroll employees in the Association’s insurance
programs and maintain the enrollment records; employ and pay the fees of accountants
to monitor premium collections and the distribution of insurance proceeds and to audit
financial statements for these insurance programs. The Association reimburses the
Taxpayer for all identifiable costs of performing these administrative services.

The Association has entered into two life insurance policies – a U.S. policy and a
Location M policy. Within the U.S. policy there are four types of coverage, which are
Active Supplemental Life, Retiree Supplemental Life, Accidental Death &
Dismemberment, and Dependent Life. Within the Location M policy there are different
types of coverage for the Active Supplemental Life Insurance, which is provided through
two different plans.

The Association each year works with the insurance carrier to calculate actuarially the
expected benefit payouts (based on historic mortality and standard mortality tables),
and to establish premiums to be charged to Association members which are computed
separately for each of the types of coverage listed above. For each type of coverage
the total member premiums, plus any interest income, are calculated to be equal to (or
slightly more than) the expected actuarially computed benefit payouts, plus any
administrative expenses. In the event that the actuarial projections are ever
inaccurately low, the insurance carrier would pay the promised life insurance benefits.

The Association’s supplemental life insurance and spousal/dependent life insurance are
purchased from the same insurance carrier as the one the Taxpayer uses to provide the
basic life insurance. However, the Taxpayer is not a party to the life insurance contracts
providing coverage to the Association members. Further, the Association’s policies are
financially self-supporting and the premiums charged under those policies are not
subsidized by the premiums charged under the Taxpayer’s basic employee life
insurance policy. In addition, the Taxpayer does not arrange for, contribute to, or
guarantee the performance of the Association’s insurance programs in any way. Only
the Association (not the Taxpayer) has authority to make final decisions with respect to
selection of insurance carriers and establishment of insurance prices.

The Taxpayer represents that the premiums charged to the Taxpayer for the basic
coverage are developed independently from any amounts charged with respect to the life
insurance programs offered through the Association. The Association performs separate
actuarial computations in developing and establishing the total annual amount of the
member contributions (both for smoker and nonsmoker coverage and coverage for
PLR-152054-12 4

employees in Location M), so as to ensure that the total member contributions under each
of the three policy types (smoker, non-smoker, and employees in Location M) equal or
exceed the total life insurance benefits payouts under the corresponding policy type for
each policy year (or series of years). There are no subsidies or credits being exchanged
between or among the three policy types (or between any of these policy types and any of
the Taxpayer’s policies), and no policy dividends paid with respect to any one policy type
(including each of the Association’s Policy Types as well as the Taxpayer’s insurance
policies) are allocated to another policy type. For example, the experience rating for each
group term life insurance plan is separately developed based on historic mortality, interest
income, administrative expenses and similar factors; reserves are not shifted between
policies; no premium loading expenses allocable to one plan are included in the premiums
of the other plan; and the dividend and rate credits attributable to each of the plans are
determined separately from each other, based on independent retrospective adjustments

The taxation of employer-provided group term insurance on the life of an employee or
retiree (employee) is governed by section 79 of the Code. Assuming a group term plan
meets the non-discrimination requirements of section 79(d), $50,000 of such coverage
is excludable from the each employee's income. For coverage above $50,000, section
79 requires an employee to include in income an amount equal to the cost of life
insurance provided under a policy carried directly or indirectly by his or her employer
(less any amounts paid by the employee toward the purchase of such insurance).
Section 79(c) requires the “cost” of the insurance to be computed by using the uniform
premiums prescribed in Table I of the section 79 regulations.

Section 1.79-1(a) of the Income Tax Regulations sets forth the conditions that must be
met before a policy of life insurance will be considered group term life insurance for
purposes of section 79 of the Code. The condition relevant to this ruling request is that
the life insurance be “provided under a policy carried directly or indirectly by the
employer.” Section 1.79-1(a)(3) of the regulations.

Section 1.79-0 of the regulations provides that the term “policy” includes two or more
obligations of an insurer (or its affiliates) that are sold in conjunction. Obligations that
are offered or available to members of a group of employees are sold in conjunction if
they are offered or available because of the employment relationship. These
obligations of the same insurer are aggregated despite actuarial sufficiency of the
premiums charged for each obligation, and even if the obligations are contained in
separate documents. Thus, as a general rule, to test whether insurance coverage is
provided under a policy carried directly or indirectly by the employer, all obligations of
the same insurer that are offered to members of a group of employees must be
aggregated. The regulations, however, allow an employer to elect to treat two or more
obligations, each of which provides no permanent benefits, as separate policies if the
premiums are properly allocated among such policies.
PLR-152054-12 5

Assuming premiums are properly allocated among two or more obligations of an insurer
that provide no permanent benefits, and assuming the employer elects to treat them as
separate policies, each policy must be tested separately to determine if it is “carried
directly or indirectly by the employer.” If a policy is not carried directly or indirectly by
the employer, no income will be imputed to an employee under section 79 of the Code
on account of the insurance provided under that policy.

Section 1.79-0 of the regulations provides that a policy of life insurance is carried
directly or indirectly by the employer if: (a) the employer pays any part of the cost of the
life insurance directly or through another person; or (b) the employer or two or more
employers arrange for payment of the cost of the life insurance by their employees and
charge at least one employee less than the cost of his or her insurance, as determined
under Table I of section 1.79-3(d)(2), and at least one other employee more than the
cost of his or her insurance, determined in the same way.

Section 61(a)(1) of the Code provides that, except as otherwise provided by law, gross
income includes all income from whatever source derived, including compensation for
services, fringe benefits, and similar items.

Section 1.61-21 of the regulations generally governs the taxation of fringe benefits not
otherwise specifically governed by another section of the Code. While that regulation
does not define the term “fringe benefit,” it gives the following as examples of fringe
benefits: “an employer-provided automobile, a flight on an employer provided aircraft,
an employer-provided free or discounted commercial airline flight, an employer-provided
vacation, an employer-provided discount on property or services, an employer-provided
membership in a country club or other social club, and an employer-provided ticket to
an entertainment or sporting event.”

Pursuant to section 1.61-21(a)(3) of the regulations, a fringe benefit provided in
connection with the performance of services shall be considered to have been provided
as compensation for such services.

Pursuant to section 1.61-21(a)(5) of the regulations, the “provider” of a fringe benefit is
that person for whom the services are performed, regardless of whether that person
actually provides the fringe benefit to the recipient. The provider of a fringe benefit need
not be the employer of the recipient of the fringe benefit, but may be, for example a
client or customer of the employer or of an independent contractor. For convenience,
the term “employer” includes any provider of a fringe benefit in connection with the
payment for the performance of services, unless otherwise specifically provided in
section 1.61 of the regulations.

In general, an employee must include in gross income the amount by which the fair
market value of a fringe benefit exceeds the sum of (1) the amount paid for the benefit
by or on behalf of the recipient, and (2) the amount, if any, specifically excluded from
PLR-152054-12 6

gross income. Therefore, for example, if the employee pays fair market value for what
is received, no amount is includible in the gross income of the employee. (Section 1.61-
21(b)(1) of the regulations.)

Special rules apply when the fringe benefit provided to the employee is group term life
insurance. For group term life insurance on the life of an individual other than an
employee (such as the spouse or dependent of the employee) provided in connection
with the performance of services by the employee, section 1.61-2(d)(2)(ii)(b) of the
regulations states that the “cost” of the insurance is includible in the gross income of the
employee. The “cost” of dependent group term life insurance must be determined
under Table I of section 1.79-3(d)(2) of the regulations. The uniform premium rates in
Table I, which are computed using the age of the insured, are based on average costs
for employer-provided group life insurance. Thus, if the dependent group term
coverage provided by the Association to the Taxpayer's employees is determined to be
a fringe benefit subject to taxation under the section 61 regulations, an employee
purchasing such insurance must include in income an amount equal to the difference
between the “cost” of the dependent coverage (as determined under Table I) and the
amount paid by the employee for the insurance. (Nothing is includible, however, if such
amount is “de minimis.” See Notice 89-110, 1989-2 C.B. 447.)

Applying the above rules to the group term life insurance on the lives of employees
available through the Association, the Taxpayer’s basic insurance coverage and the
supplemental insurance coverage provided available through the Association are
available to the eligible employees because of the employment relationship. In addition,
both the basic coverage and the supplemental coverage are purchased from the same
insurer. Therefore, the obligations contained in the Taxpayer’s basic coverage and the
supplemental coverage available through the Association will be treated as a single
“policy” for purposes of section 79, unless the requirements have been met to elect to
treat such obligations as separate policies. Because neither the basic coverage nor the
supplemental coverage contains permanent benefits, the only requirement for electing
separate treatment is that the premiums be properly allocated among the policies.

Based on the information submitted and representations made, and authorities cited
above, we conclude as follows:

1. It can be determined that the premiums are properly allocated among the policies
   (thus permitting the Taxpayer to treat the Association’s policies as separate policies
   from the Taxpayer’s basic life insurance programs), if for each policy year, it can be
   shown that the premiums charged to the Taxpayer for the basic coverage are
   developed independently from any amount charged with respect to the
   supplemental insurance programs offered through the Association, that the
   Association performs separate actuarial computations in developing and
   establishing the total annual amount of the member contributions so as to ensure
   that the total member supplemental insurance contributions under each of the
   PLR-152054-12 7

   subsets of the Association’s two insurance policies for its U.S. and Location M
   employees (which in the U.S. includes subsets for Active Supplemental Life,
   Retiree Supplemental Life, Accidental Death & Dismemberment, and Dependent
   Life, and which in Location M includes only Active Supplemental Life Plans) equal
   or exceed the total life insurance benefits payouts under the corresponding policy
   subset for each policy year (or series of years), that there are no subsidies or
   credits being exchanged between or among the Association’s policies (or between
   any of the Association’s policies and any of the Taxpayer’s policies), and no policy
   dividends paid with respect to any one policy (including each of the Association’s
   policies as well as the Taxpayer’s insurance policies) are allocated to another
   policy. For example, the experience rating for each group term life insurance plan
   is separately developed based on historic mortality, interest income, administrative
   expenses and similar factors; reserves are not shifted between policies; no
   premium loading expenses allocable to one plan are included in the premiums of
   the other plan; and the dividend and rate credits attributable to each of the plans
   are determined separately from each other, based on independent retrospective
   adjustments.

2. Assuming that the Taxpayer elects to treat its basic employee life insurance
   programs as separate policies from the Association’s supplemental employee
   group term life insurance, the supplemental employee group term life insurance
   provided by the Association to the active, retired and disabled former employees of
   the Taxpayer will not be treated as provided under a policy carried directly or
   indirectly by the Taxpayer within the meaning of section 79(a) of the Code.
   Accordingly, no income will be imputed under section 79(a) of the Code to those
   employees purchasing the supplemental life insurance offered by the Association.

3. The group term life insurance coverage provided by the Association on the lives of
   the spouses and children of the Association members paid for entirely by the
   members on an after-tax basis is not “provided in connection with the performance
   of services” by the Association members within the meaning of that phrase in
   section 1.61-2(d)(2)(ii)(B) of the regulations. Accordingly, no amount is includible
   in the gross income of an employee of the Taxpayer on account of the group term
   life insurance coverage provided by the Association on the lives of the spouse and
   children of the employees.

These rulings are contingent on the receipt of a determination from the Service that the
Association is a VEBA described in section 501(c)(9) of the Code.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal tax consequences of the transaction under any other provision of the Code or
regulations.
PLR-152054-12 8

This letter ruling is directed only to the Taxpayer who requested it. Code section
6110(k)(3) provides that it may not be used or cited as precedent.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to the taxpayer's representative.

                                               Sincerely,


                                               Harry Beker, Chief
                                               Health & Welfare Branch
                                               Office of Division Counsel/Associate
                                               Chief Counsel (Tax Exempt and
                                               Government Entities)

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