Taxation of Life Insurance

[RTK]

Defined benefit pension plan buys group term life insurance policy providing retiree death benefit coverage for retirees at a fixed dollar monthly premium per $1,000 per retiree.

It is fairly clear that the cost of the life insurance coverage is taxed to retirees under 1.72-16. What is not clear is how the cost is calculated. Notice 2002-8 appears to provide that the cost is determined by the Table 2001 premiums or by insurer's lower published premium rates (satisfying the conditions of the Notice).

However, one publication states that for term insurance held by a qualified plan, it is not settled whether the cost is determined by the actual premium or the Table 2001 premium. Although not stated, I think the publication was considering 1.72-16(b)(2) and 1.72-16(b)(3).

1.72-16(b)(2) states that if employer contributions or earnings are used to buy a life insurance contract, the cost of the life insurance protection is included in the gross income of the participant. It makes no reference to how the cost of the life insurance protection is calculated.

1.72-16(b)(3) states that if death proceeds exceeds cash value, the excess is considered the life insurance protection and further states that the cost of such insurance will be considered to be the net premium cost as determined by the IRS.

Thus, 1.72-16(b)(3) provides that the cost of life insurance is determined by the IRS when there is a cash value, but 1.72-16(b)(2) does not. It may have been this difference that the publication was considering.

I would appreciate any comments.

[GBurns]

The items that you have mentioned and cited seem related to life insurance arrangements between an employer and employee in a general sense. However, I seem to remember that life insurance in a qualified plan had separate special rules and that insurance policies that provide post-retirement benefits also have other special rules.