IRS Tax Code Section 79 Tax Savings

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  • Permanent Benefit Plan
A properly structured Group-Term Life Permanent Benefit Plan under Section 79 of the Internal Revenue Code (the “Code”) allows a “C” Corporation to:
  1.  Deduct up to 100% of the premiums as a business expense;
  2.  Provide a sizable death benefit at a reasonable cost to employees;
  3.  Enable the employee to take cash value distributions from the life insurance policy, income tax free, and use those distributions to provide for a comfortable retirement income.
The design of the plan must comply with the IRS Regulations under Code Section 79, Section 6052 and Revenue Procedure 2005-25.
Salient Features:
  • The Business Owner’s contributions are tax-deductible (including life insurance premiums)
  • Insurance cash values grow tax-deferred and may be tied to an Index such as the S&P 500 (principal may be protected from a market downturn) when an Indexed Universal Life Policy is used (IUL).
  • Retirement income can be structured with planned distributions which may be free of income taxes!
  • Death benefits pass to beneficiaries income tax free!
  • Death benefits may be excluded from the estate with proper planning
Such programs are available to employees of “C” Corporations (and LLCs taxed as “C” corporations), but not to 2% owners or partners of LLCs, partnerships or “S” corporations.
Up to $50,000 of group-term life insurance can be provided to an employee with no increase in the employee’s gross income.  Any amount of group-term life insurance in excess of $50,000 is taxable to the employee and must be reported by the employer on the employee’s W-2 as “other compensation” as described under IRC Section 6052. Any life insurance, which has a cash value, will also result in additional taxable income and must be reported by the employer on the employee’s W-2.  In addition, eligible employees may purchase permanent (cash-value) life insurance as provided in the Regulations.
Because of favorable group underwriting individuals oftentimes obtain coverage that might otherwise be difficult if not impossible to acquire.  No physical examination is ever required.  Usually the completion of a non-medical questionnaire is all that’s necessary.  Even corporations with fewer than 10 employees can provide coverage provided they comply with the rules.
Such benefit plans are desirable for employers that wish to supplement their existing retirement plans and obtain additional tax deductions by providing these benefits. These plans are also appropriate for employers that wish to provide exceptional benefits to their employees, without vesting and benefit accrual requirements that apply to qualified retirement plans.
Life insurance plans are subject to non-discrimination rules that require “non-highly compensated” employees to benefit under the plan at a rate comparable to the rate of “highly compensated” or “key employees”. However, these requirements are easily satisfied.