The Special Tax Treatment Given to Small Employers (Under 10 Employees) with Group Life Insurance

Special tax treatment applies to small groups (i.e., groups insuring under ten lives). In under-ten group term life plans, premiums are tax deductible for the employer and not taxable income up to the $50,000 limit only if the following conditions are met:

The employer provides group coverage for either:

  • all full-time employees; or
  • all full-time employees who can prove, to the insurer’s satisfaction, insurability assuming that evidence of insurability affects eligibility.
  • The amount of insurance is computed:
  • as a uniform percentage of compensation; or
  • on the basis of coverage brackets established by the insurer.
  • The plan may provide for a reduction in the amount computed under either method for employees who do not provide satisfactory evidence of insurability.
  • No bracket may exceed two-and-one-half times the next lower bracket.
  • The lowest bracket must be at least 10 percent of the highest bracket.
  • The plan may establish a separate schedule of coverage within similar guidelines for employees who are over age sixty-five.
  • Evidence of insurability, if required, is limited to a medical questionnaire completed by the employee and the plan may not require a physical examination.

Even if all three of these requirements are not met, a group term plan with less than ten lives will still qualify for favorable tax treatment if it meets the following requirements:

  • Coverage is available under a common plan to employees of two or more related employers.
  • Coverage is restricted to, but must be provided for, all employees who belong to an organization (such as a union) that carries on other substantial activities on behalf of the employer.
  • Evidence of insurability is not required, and in no way does that affect the amount of insurance available to individual employees.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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