Cafeteria Plans

[Guest Susan Middaugh]

After reviewing the new proposed regulations issued August 3, 2007 by the IRS and published in the Federal Register, I have a question on the implications about group term life insurance, which is now a qualified benefit.

My question: with the new proposed regs, will employers and employees save on payroll taxes for this benefit if it's in a cafeteria plan?

The new proposed regs say: the entire amount of salary reduction and employer flex-credits for group term life insurance on the life of an employee is excludible from the employee's income.

The new proposed regs provide that the employee includes in gross income the Table I cost of the excess coverage (minus all after-tax contributions by the employee for group-term life insurance coverage) and that the entire amount of salary reduction and employer flex-credits for group term life insurance coverage on the life of the employee is excludible from the employee's gross income.

Susan Middaugh, CEBS

Have Pen, Will Travel

Baltimore

410 727-0336

[Don Levit]

Susan:

It certainly sounds like this would be kosher.

My initial thought is it seems like the proposed regulations are very clear.

However, how would the regulations deal with individual life policies?

Would their treatment from the IRS be different from how state departments of insurance may react (using individual health policies as an example)?

Don Levit

[J Simmons]

Group term life policies have, for some time, been an available cafeteria plan benefit.

The regulations only protect from taxation the premiums to the extent they are for death benefit coverage up to $50,000 on the life of the employee.

Individual life policies? I don't see that as an appropriate cafeteria plan benefit. IRC sec 125(f) only references, for life insurance purposes, section 79 (Group-term life insurance for employees).

[Jacmo]

Susan: To answer your question: Employees and employers will save on the cost of term life just as they would any other qualified benefit.

Group Term Life is subject to the rules of section 79, and the rules under 125 are reflecting some of those requirements.

An employee can pre-tax the cost of up to 50,000 face value coverage. That coverage is now considered "employer provided" coverage. So any other or additional employer provided group term life will require that the value of that excess (over 50,000 of employer provided coverage) be added back to the employee's W-2.