Group-Term Insurance; Uniform Premiums

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8821]

RIN 1545-AN54

Group-Term Insurance; Uniform Premiums

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations revising the uniform

premium table used to calculate the cost of group-term life insurance

coverage provided to an employee by an employer. These regulations

provide guidance to employers who provide group-term life insurance

coverage to their employees that is includible in the gross income of

the employees.

DATES: Effective Date: These regulations are effective July 1, 1999.

Applicability Date: For the applicability of these regulations to

group-term life insurance coverage, see Sec. 1.79-3(e).

FOR FURTHER INFORMATION CONTACT: Betty J. Clary, (202) 622-6070 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations

under section 79 of the Internal Revenue Code. These regulations revise

the uniform premiums used to calculate the cost of group-term life

insurance provided to employees. The revised uniform premiums are

effective generally on July 1, 1999. However, employers have until the

last pay period of 1999 to make any needed adjustments of amounts

withheld for purposes of the FICA. Further, an employer may continue

using only 10 age-brackets for making its calculations until January 1,

2000. A special effective date applies to a policy of life insurance

issued under a plan in existence on June 30, 1999, if the policy would

not be treated as carried directly or indirectly by an employer under

Sec. 1.79-0 of the Income Tax Regulations using the section 79 uniform

premium table in effect on June 30, 1999. If this is the case, the

employer may continue using such table for determining if the policy is

carried directly or indirectly by an employer until January 1, 2003.

Section 79 generally permits an employee to exclude from gross

income the cost of $50,000 of group-term life insurance carried

directly or indirectly by an employer. The remaining cost of the group-

term life insurance is included in the employee's gross income to the

extent it exceeds the amount, if any, paid by the employee for the

coverage. Income imputed under section 79 is not subject to Federal

income tax withholding. However, it is subject to FICA tax and, for

active employees, an employer is required to withhold the FICA tax at

least once a year. Also, the amount of the income imputed under section

79 is reported on an employee's Form W-2.

Section 79 provides for the cost of the group-term life insurance

to be determined on the basis of five-year age brackets prescribed by

regulations. Those costs are set forth in the regulations in Table I

entitled ``Uniform Premiums for $1,000 of Group-term Life Insurance

Protection.'' Sec. 1.79-3(d)(2). The group-term life insurance costs

are calculated on a calendar month basis. Sec. 1.79-3 (a) through (c).

Table I was initially published on July 6, 1966 (31 FR 9199), and

was revised on December 6, 1983 (48 FR 54595). In a notice of proposed

rulemaking (REG 209103-89) published in the Federal Register (64 FR

2164) on January 13, 1999, the IRS and Treasury proposed revising the

Table I rates, effective July 1, 1999. The uniform premiums under the

proposed table were lower in all age groups than those under the then-

current section 79 regulations.\1\ The proposed table also added a new

age bracket to the table for ages under 25. A special effective date

was proposed solely for purposes of determining whether a policy is

carried directly or indirectly by the employer.

---------------------------------------------------------------------------

\1\ The revised uniform premiums are based on mortality

experience for individuals covered by group-term life insurance

during the 1985-1989 period, as reflected in a Society of Actuaries

report. The mortality rates have been adjusted for improvements in

mortality from 1988 (the weighted midpoint for the data used in the

1985-89 study) through 2000, based on the same rates of mortality

improvement that were adopted by the Society of Actuaries Group

Annuity Valuation Table Task Force for the period 1988-1994.

Separate mortality rates have been derived for males and females,

and the uniform premium table reflects a 50/50 blend of the male and

female mortality rates. The resulting mortality projections have

been adjusted to reflect a 10 percent load factor.

---------------------------------------------------------------------------

Explanation of Provisions

Uniform Premium Table

The IRS received 26 written comments concerning the proposed

regulations. No commentator suggested changes to the proposed uniform

premium table. The final regulations reflect the uniform premium table

that was set forth in the proposed regulations.

General Effective Date

Many of the comments received by the IRS discussed the proposed

effective date for the uniform premium rates. Some commentators agreed

with the proposed effective date of July 1, 1999. Many of the

commentators asked that the effective date be made retroactive to

January 1, 1999. A few of the commentators requested that it be

postponed, generally until January 1, 2000. Some commentators suggested

that each employer should be allowed to decide the effective date for

its employees, within a limited period of time set by the IRS. Some

commentators requested that the effective date of the

[[Page 29789]]

revised Table I be the first payroll period beginning on or after July

1, 1999.

Those advocating a January 1, 1999 effective date expressed the

view that employees should get the benefit of the lower Table I rates

for the entire year. In their opinion, additional administrative costs,

if any, for implementing revised rates retroactively, rather than July

1, 1999, would be minimal. Some commentators observed that the use of a

January 1 effective date would permit the use of a single set of Table

I rates for the entire year, rather than a bifurcated rate for 1999.

However, there was no consensus as to whether this factor suggests

using an effective date of January 1, 1999 or (as discussed below)

January 1, 2000.

Some commentators suggested a January 1, 2000 effective date on

account of resource constraints resulting from year 2000 compliance.

One of the commentators also observed that many payroll systems are now

``hard coded'' for making group-term calculations using only 10 age

brackets, and that the additional age bracket (for ages under 25) in

the revised Table I would make it more difficult to modify those

payroll systems by July 1, 1999. In the public hearing that was held on

the proposed regulations on May 6, 1999, the sole speaker reiterated

its written comment in which it requested that the effective date be

postponed, generally until January 1, 2000, and indicated that a change

in the proposed regulations to not mandate use of the ``Under 25'' age

bracket would significantly reduce the administrative burden of a July

1, 1999 effective date.

The IRS and Treasury continue to believe that an effective date of

July 1, 1999 provides the best way to balance the ability of employees

to obtain the tax benefits of the lower Table I rates with the concerns

expressed by some commentators about modifying payroll systems. As

stated previously, income imputed under section 79 is not subject to

Federal income tax withholding. Further, while it must be reported on

Form W-2 and it is subject to FICA tax withholding, changes to payroll

systems are not required to be effectuated by the July 1, 1999

effective date.

Specifically, Notice 88-82 (1988-2 C.B. 398), ``Reporting FICA

Taxes on Group-Term Life Insurance,'' explains that an employer may

treat the imputed income amounts as paid either by the pay period, by

the quarter, or on any other basis so long as the payments are treated

as paid at least as often as once a year. The employer need not inform

the IRS of a formal choice of payment dates or the dates chosen.

Furthermore, the same choice need not be made for all employees. The

employer may change methods at any time, so long as all imputed income

amounts includible in a calendar year are treated as paid by December

31 of the calendar year. Notice 88-82, therefore, permits those

employers currently withholding the FICA taxes on a pay period basis to

either (1) change methods to treat the Table I amounts includible in

income after July 1, 1999 as paid on December 31, 1999, or (2) continue

to withhold using the old Table I rates, so long as adjustments for the

post-July 1, 1999 FICA withholding amounts are made by the last pay

period for 1999.

Accordingly, the regulations provide that the revised Table I rates

are effective, generally, on July 1, 1999. However, in order to further

minimize the administrative burden of a July 1, 1999 effective date,

the regulations allow employers to continue using 10 age brackets until

January 1, 2000, thereby eliminating the need for ``hard coded''

systems to be modified during 1999 to include the ``Under 25'' age

bracket.

Special Effective Date

Several comments were received on the topic of the effective date

for purposes of determining whether, for purposes of section 79, a

policy is carried directly or indirectly by the employer. A policy is

considered carried directly or indirectly by the employer if (a) the

employer pays any part of the life insurance, or (b) the employer

arranges for payment of the cost of the life insurance by its employees

and charges at least one employee less than the cost of his or her

insurance (as determined under Table I) and at least one other employee

more than his or her insurance (as determined under Table I).

Sec. 1.79-0.

The IRS and Treasury recognize that the premiums charged to

employees under some employee-pay-all plans may involve premiums

charged to employees that are all at or below the uniform premium rates

prior to the revision of Table I. Because the revised Table I rates are

lower than the rates under the prior table, it is likely that the

premiums charged under some of those policies will now straddle the new

rates. As a result, the life insurance provided under those policies

will become subject to section 79. The notice of proposed rulemaking

proposed a special effective date rule to apply to any policy of life

insurance issued under a plan in existence before the general July 1,

1999 effective date. Under the special rule, if a policy would not be

treated as carried directly or indirectly by an employer using the

Table I rates in effect on June 30, 1999, the policy would continue to

be treated as not carried directly or indirectly by the employer until

the first plan year that begins after the general effective date.

Several comments received about the proposed special rule support

the use of a special effective date for the purpose of determining

whether a policy is carried directly or indirectly by the employer.

However, most of those comments requested that the special rule be

extended under certain identified circumstances. One commentator

favored extending the special effective date for group-term coverage

provided under a collectively bargained agreement. The commentator

noted that collectively bargained plans may not be able to adjust rates

within the time period of the proposed special rule because rate

changes would require a substantive change to benefits in the middle of

a contract. Two commentators suggested that the special effective date

for a plan with a multi-year guarantee be extended until the end of the

last plan year covered by the guarantee. Others suggested that the

revised Table I rates not be effective for purposes of determining if

the plan is carried directly or indirectly by the employer until there

is a change in a plan's premium rates. Another comment addressed an

issue under the definition of carried directly or indirectly by the

employer different from the special effective date issue. The comment

suggested that a policy not be treated as carried directly or

indirectly by the employer if the policy charges employees actuarially

determined, age-specific premium rates, rather than the rates in the

five-year age brackets in Table I.

The IRS and Treasury agree that some additional time should be

given to employee-pay-all plans that would previously not be subject to

section 79. Accordingly, the final regulations provide a special rule

under which, until January 1, 2003, an employer can use either the

Table I rates in effect on June 30, 1999 or the new Table I rates in

the final regulation for determining if a plan in existence on June 30,

1999 is carried directly or indirectly by the employer.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory

[[Page 29790]]

Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations,

and, therefore, a Regulatory Flexibility Analysis is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of

proposed rulemaking preceding these regulations was submitted to the

Small Business Administration for comment on its impact on small

business.

Drafting information. The principal author of these regulations is

Betty J. Clary, Office of Associate Chief Counsel (Employee Benefits

and Exempt Organizations), IRS. Other personnel from the IRS and the

Treasury Department also participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In Sec. 1.79-1, paragraph (d)(7) is revised to read as

follows:

Sec. 1.79-1 Group-term life insurance--general rules.

* * * * *

(d) * * *

(7) Example. The provisions of this paragraph may be illustrated by

the following example:

Example. An employer provides insurance to employee A under a

policy that meets the requirements of this section. Under the

policy, A, who is 47 years old, received $70,000 of group-term life

insurance and elects to receive a permanent benefit under the

policy. A pays $2 for each $1,000 of group-term life insurance

through payroll deductions and the employer pays the remainder of

the premium for the group-term life insurance. The employer also

pays one half of the premium specified in the policy for the

permanent benefit. A pays the other half of the premium for the

permanent benefit through payroll deductions. The policy specifies

that the annual premium paid for the permanent benefit is $300.

However, the amount of premium allocated to the permanent benefit by

the formula in paragraph (d)(2) of this section is $350. A is a

calendar year taxpayer; the policy year begins January 1. In year

2000, $200 is includible in A's income because of insurance provided

by the employer. This amount is computed as follows:

(1) Cost of permanent benefits.................................. $350

(2) Amounts considered paid by A for permanent benefits (\1/2\ 150

x $300).......................................................

(3) Line (1) minus line (2)..................................... 200

(4) Cost of $70,000 of group-term life insurance under Table I 126

of Sec. 1.79-3................................................

(5) Cost of $50,000 of group-term life insurance under Table I 90

of Sec. 1.79-3................................................

(6) Cost of group-term insurance in excess of $50,000 (line (4) 36

minus line(5)).................................................

(7) Amount considered paid by A for group-term life insurance 140

(70 x $2)....................................................

(8) Line (6) minus line (7) (but not less than 0)............... 0

(9) Amount includible in income (line (3) plus line (8))........ 200

* * * * *

Par. 3. Section 1.79-3 is amended as follows:

1. Paragraph (d)(2) is revised.

2. Paragraphs (e) and (f) are redesignated as paragraphs (f) and

(g), respectively.

3. New paragraph (e) is added.

The revision and addition read as follows:

Sec. 1.79-3 Determination of amount equal to cost of group-term life

insurance.

* * * * *

(d) * * *

(2) For the cost of group-term life insurance provided after June

30, 1999, the following table sets forth the cost of $1,000 of group-

term life insurance provided for one month, computed on the basis of 5-

year age brackets. See 26 CFR 1.79-3(d)(2) in effect prior to July 1,

1999, and contained in the 26 CFR part 1 edition revised as of April 1,

1999, for a table setting forth the cost of group-term life insurance

provided before July 1, 1999. For purposes of Table I, the age of the

employee is the employee's attained age on the last day of the

employee's taxable year.

Table I.--Uniform Premiums for $1,000 of Group-Term Life Insurance

Protection

------------------------------------------------------------------------

Cost per

$1,000 of

5-year age bracket protection

for one

month

------------------------------------------------------------------------

Under 25.................................................. $0.05

25 to 29.................................................. .06

30 to 34.................................................. .08

35 to 39.................................................. .09

40 to 44.................................................. .10

45 to 49.................................................. .15

50 to 54.................................................. .23

55 to 59.................................................. .43

60 to 64.................................................. .66

65 to 69.................................................. 1.27

70 and above.............................................. 2.06

------------------------------------------------------------------------

* * * * *

(e) Effective date--(1) General effective date for table. Except as

provided in paragraph (e)(2) of this section, the table in paragraph

(d)(2) of this section is applicable July 1, 1999. Until January 1,

2000, an employer may calculate imputed income for all its employees

under age 30 using the 5-year age bracket for ages 25 to 29.

(2) Effective date for table for purposes of Sec. 1.79-0. For a

policy of life insurance issued under a plan in existence on June 30,

1999, which would not be treated as carried directly or indirectly by

an employer under Sec. 1.79-0 (taking into account the Table I in

effect on that date), until January 1, 2003, an employer may use either

the table in paragraph (d)(2) of this section or the table in effect

prior to July 1, 1999 (as described in paragraph (d)(2) of this

section) for determining if the policy is carried directly or

indirectly by the employer.

* * * * *

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: May 25, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury (Tax Policy).

[FR Doc. 99-13833 Filed 5-28-99; 11:22 am]

BILLING CODE 4830-01-U