Converting Supp. Life from Post to Pre-Tax

[PhilB]

My company recently implemented a new Supplemental life benefit on a pre-tax basis. However, we have an old Supp Life plan that a few active employees are grandfathered under that still deducts premiums on a after-tax basis - Are there any compliance/regulation issues if we switch these people to pre-tax?

[Guest Harry O]

What do you mean by "supplemental" life insurance? Do you mean employee-paid group-term life insurance that is supplemental to employer provided group-term life? If so, are you taking the position that the supplemental coverage is not subject to section 79 (the imputed income rules)?

[PhilB]

Yes, employee-paid group-term life insurance that is supplemental to employer provided group-term life. My understanding is that the amount over $50,000 would have imputed income tax applied. I've inherited this benefit program and am not terribly familiar with the ramifications involved in making a change of this type.

[mroberts]

There shouldn't be a problem converting the employees to a pre-tax premium arrangement as long as something in the policy doesn't indicate that it can't be done. Since you said it was an extremely old plan, you never know what kind of funky provisions the dinosaurs have.

Imputed income only deals with employer paid life insurance. Therefore, even if I elect $5 billion dollars worth of supplemental life insurance, there's no imputed income tax to worry about.

[PhilB]

Is that another way of saying that because the employee premium is pre-tax, the doctrine of constructive receipt (or rather, lack of constructive receipt) applies to the amounts over $50,000? In essence, the premium payment is considered to come from the employer, therefore the life benefit is not taxable -Or am I missing the boat completely? Does anyone know of a good understandable source that explains the imputed income concept?

[Guest Harry O]

My concern is that allowing employees to pay for supplementary coverage with pre-tax dollars will convert the supplemental policy to employer-provided and thus subject to section 79. Pre-tax contributions are treated as employer payments under the tax law. My recollection is that supplemental life plans escape section 79 in part because they are employee pay-all. Running premiums through a cafeteria plan to make them pre-tax would seem to jeopardize this non-section 79 treatment.

[PhilB]

The explanation that I have been provided is that with employer provided group-term life insurance, if you apply the imputed income rules the death benefit is tax free regardless of the Pre-tax / Post-tax employee contribution decision. If employee contributions are taken on a post-tax basis it would simply reduce the amount of imputed income.

[Guest Harry O]

I agree if your supplemental policy is intended to be subject to section 79. However, many supplemental policies are designed to be exempt from section 79 and imputed income. Make sure your "grandfathered" policy isn't one of these.

[IRC401]

If the employee pays on a pre-tax basis, the benefit is an employer provided benefit, the plan is subject to ERISA, and the employees have imputed income.