Employee-paid optional life insurance could avoid imputed income

Plain-English summary

A life insurer provided employees basic group-term life insurance at no cost and offered separate optional coverage paid for by employees with after-tax dollars. The basic and optional obligations ordinarily would be treated as one policy because the same insurer offered both through the employment relationship. The IRS found that the premiums were independently and properly allocated and neither policy provided permanent benefits, so the employer could elect to treat the optional coverage as a separate policy. Because the employer paid none of the optional premiums and all employee rates were at or below the Table I rates, that coverage would not be treated as carried by the employer and would not create imputed income under section 79.

Ruling snapshot

• Request: Confirm that employee-paid optional group-term life insurance could be treated separately from employer-paid basic coverage
• Outcome: Approved if the employer makes the separate-policy election
• Key authorities: I.R.C. § 79; Treas. Reg. §§ 1.79-0, 1.79-1, 1.79-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201542003                                              Third Party Communication: None
Release Date: 10/16/2015                                       Date of Communication: Not Applicable
Index Numbers: 79.00-00
                                                               Person To Contact:
                                                               -------------------, ID No. --------------
                                                               Telephone Number:
                                                               ----------------------
                                                               Refer Reply To:
------------------------------------------------------------   CC:TEGE:EB:HW
------------                                                   PLR-102028-15
-------------------------                                      Date:
----------------------------                                   July 06, 2015

-------------------------------------
--------------------------------------------------




LEGEND
Taxpayer = ---------------------------------------------
           ---------------------------------------------
           ---------------------------------------------
           ---------------------------
State    = --------------




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


This is in response to a request submitted on behalf of Taxpayer by its authorized
representatives. Taxpayer is asking for rulings regarding the federal income tax
consequences of offering to Taxpayer’s employees ------------------------------------------------
group term life insurance coverage on the lives of these employees ---------------------------
----------.

FACTS

Taxpayer is a life insurance company organized under the laws of State. Taxpayer
provides basic group term life insurance coverage for its employees at no cost to them.
PLR-102028-15                                          2

In addition, Taxpayer’s employees are offered the ability to purchase optional group
term life insurance. ------------------------------------------------------------------------------------------
-----------------------------------------------------------. The employees ----------------------------------
purchase the optional insurance from Taxpayer on an after-tax basis. The rates
charged to active employees -------------------------------are higher for those who use
tobacco than for those who do not use tobacco. The rates charged to those employees
-------------------------------are all the same as, or below, the Table I uniform premium rates
found in section 1.79-3(d)(2) of the Income Tax Regulations.

Taxpayer represents that the premiums charged for optional life insurance are determined
independently of the basic coverage; no premium loading expenses are allocated between
the policies; and dividends and rate credits for the policies are determined separately.
Taxpayer further represents that the premiums charged under the optional life insurance
policy are the same as the company charges unrelated employers with similar coverage
and terms.

LAW AND ANALYSIS

The taxation of group term insurance on the life of an employee carried directly or
indirectly by an employer is governed by section 79 of the Internal Revenue Code. For
this purpose, section 1.79-0 of the regulations defines the term “employee” as (a) a
person who performs services if his or her relationship to the person for whom services
are performed is the legal relationship of employer and employee described in
section 31.3401(c)-1; or (b) --------------------------------------------------------------------------------
--------------------------a person who formerly performed services as an employee.

Assuming a group term plan meets the non-discrimination requirements of section
79(d), the cost of $50,000 of such coverage is excludable from 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.

Life insurance is subject to section 79 only if it is provided under a policy carried directly
or indirectly by the employer. Reg. section 1.79-1(a)(3).

Section 1.79-0 of the regulations provides that a policy of life insurance is “carried
directly or indirectly” by an 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
PLR-102028-15                                     3

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 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. The actuarial
sufficiency of the premium charged for each obligation is not taken into account in
determining whether the obligations are sold in conjunction, whether or not 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 and treated as one policy. 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.

Provided premiums are properly allocated among two or more obligations of an insurer
that provide no permanent benefits, and provided further that the employer elects to
treat them as separate policies, each policy is 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.

Applying the above rules to the group term life insurance on the lives of Taxpayer’s
employees, both the Taxpayer’s basic insurance coverage and the optional insurance
coverage are available to the eligible employees ----------------------------------------------------
--------------------------------------------------------------because of the employment relationship.
In addition, both the basic insurance coverage and the optional coverage are purchased
from the same insurer. Therefore, the obligations contained in Taxpayer’s basic
coverage and optional coverage will be treated as a single "policy" for purposes of
section 79, unless the requirements have been met to allow Taxpayer to elect to treat
such obligations as separate policies, and Taxpayer so elects. Because neither the
basic coverage nor the optional coverage contains permanent benefits, the only
requirement for Taxpayer electing to treat the optional insurance as a separate policy
for purposes of determining whether or not the optional coverage is “carried directly or
directly by the employer” (and, thus, whether or not that coverage is subject to imputed
income under section 79) is that the premiums be properly allocated among the policies.
If optional insurance coverage offered by Taxpayer is treated as a separate policy, the
optional insurance on the life of an employee is not treated as “carried directly or
indirectly” by Taxpayer because Taxpayer pays no part of the insurance and all
premium rates charged to the employees for the optional insurance are the same as or
less than the Table I rates.
PLR-102028-15                                        4

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

      1. The premiums for the basic insurance and the optional insurance are properly
         allocated so that Taxpayer can elect to treat the optional insurance as separate
         from the basic insurance.

      2. Provided that the Taxpayer elects to treat the optional insurance separately from
         the basic, optional insurance on the life of an employee -------------------------------------
         ------------------------------------------------------------------------ will not be treated as
         provided under a policy carried directly or indirectly by 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 optional life insurance.

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. In particular, no opinion is expressed concerning the tax consequences of
coverage on the life of any individual who is not an employee within the meaning of
section 1.79-0 of the regulations.

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 representatives.


                                                         Sincerely,

                                                         /S/

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


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