$50,000 Life Ins Limit ans Self-employed

[sloble@crowleyfleck.com]

I see that Code Sec. 79 applies a $50,000 cap on the amount of life insurance that can be received by an EMPLOYEE under a group term life insurance plan. I presume this means that self-employed individuals (partners) who receive group term life insurance through the firm's plan are not subject to this limit.

Who has a cite that describes the life insurance tax rules that apply to the self-employed?

[Lori Friedman]

$50,000 isn't the maximum life insurance benefit that can be provided to an employee. It's the amount of benefit that can be provided tax-free. The cost of coverage in excess of $50,000 is gross compensation to the employee. The taxable amount isn't the employer's actual premium cost, but an amount calculated using a uniform premium rate schedule. The authority is I.R.C. Sec. 79.

For example, it's not unusual for an employer to provide group-term life insurance equal to 2X or 3X annual salary. That's ok, but if the benefit exceeds $50,000, the employee has to recognize some taxable compensation.

Partners aren't employees, and they don't get nontaxable fringe benefits. If a partner is covered by his/her firm's group-term life insurance policy, the entire cost is treated as a guaranteed payment.

[Kirk Maldonado]

AshleyL:

In case you aren't well-versed in the nuances of partnership taxation, the bottom line of what Lori said is that the premium payments on behalf of that individual are taxable income to the partner.

[sloble@crowleyfleck.com]

Thanks--my initial post was written in haste and not worded well but you have confirmed my initial thoughts

[Ron Snyder]

Kirk-

The difficult question in such situation is how much income is imputed to the partner. Since it is given that it is a "group term life insurance program" (presumably complying with Section 79, it appears to me that the greater of the actual premiums or the Table I amount would be taxable to the self-employed individual. Do you agree?

Ron

[Lori Friedman]

Kirk, You're correct when you say that the entire amount of the premium is income for a partner. I.R.C. Sec. 79 and its regulations, including the Table I uniform premium values, relate only to group-term insurance on an employee's life. The rules don't apply to partners.

[Ron Snyder]

If a partnership maintains a group-term life insurance arrangement for its employees, and the plan covers partners as well, it is still a GTLIA. I believe that the treatment of partners is the same as the treatment of key employees in a discriminatory GTLIA, ie, the GREATER of the actual premium or the premium imputed under Table I.

[Kirk Maldonado]

Vebaguru:

Do you have a cite that supports your position? In doing a brief amount of research I couldn't find anything that supports it; everything goes the other way.

Section 79 says that it applies to insurance purchased for eemployees and self-employed individuals are, by definition, not employees. Thus, section 79 does not apply to self-employed individuals.

It would be a truly odd result if the rules of section 79 governed the tax treatment of individuals who aren't even subject to that provision in the first place.

[Lori Friedman]

Kirk, I'm fully agreeing. The premiums are taxable to the partner. It's as if the partner used his own after-tax dollars to pay life insurance premiums (which, if you think about it, is exactly what happens...just indirectly).