History of “Section 79″ Retirement Products
Section 79 of the IRS code was enacted in 1953 by Congress. It originally outlined that an employer could sponsor and pay for up to $30,000 of group, Term Life Insurance for eligible employees; provided that the employer was neither the owner nor the beneficiary of the insurance. In the 1970′s COBRA increased the amount to where it stands today, at $50,000.
In the early 1980′s the Economic Benefit Rules for the Calculation of Non-Cash Compensation had a significant impact on the net deductiblity of the Permanent Life Insurance Benefit portion of Section 79. There were also some changes in early 2004 related to the Fair Market Value of Life Insurance policies.
The end result is that today, any form of group life insurance paid by the employer, whether group term life Insurance or permanent life insurance, if adopted according to IRS Section 79, is a deductible business expense as an Employee Benefit.
Section 79 Permanent Plans
Most organizations are familiar with group term life insurance programs – particularly those that offer up to $50,000 of group term life insurance to employees. These programs, sanctioned by Section 79 of the Internal Revenue Code, also permit employers to provide term life insurance in excess of $50,000 to employees.
What is less commonly understood is that the same Section 79 permits a group insurance plan to also provide permanent benefits. Treasury Regulations, Subchapter A, Sec. 1.79-01 defines “permanent benefit” as “an economical value extending beyond one policy year (for example, a paid-up or cash surrender value) that is provided under a life insurance policy” When a compliant Section 79 plan containing permanent benefits is adopted by an employer, there are several significant employer and employee advantages:
- All contributions to the plan are generally 100% deductible to the business.
- Only a portion of these amounts are included in the participant’s income.
- Plan assets (in the form of life insurance policy cash values) accumulate tax-deferred.
- Cash value can be withdrawn in tax-free distributions utilizing the policy loan provisions.
- In the event of the participant’s death, an income tax-free survivor benefit provided.
The participant (employee) has all of the rights accorded to a policy owner under the life insurance contract, including the option of receiving an income stream from the insurance policy to the extent of the policy’s cash value through the use of tax-free loans and withdrawals.
Key employees and prospective new hires will welcome the benefits of participation in a Section 79 Permanent plan. The team at Business Planning Group will work with the owners, executives and employees to ensure that their plans are both IRS compliant and that implementation is virtually seamless.
Benefits of a Section 79 Permanent Plan
For the Employer:
- Contributions to the plan are tax-deductible, assuming they constitute “reasonable compensation.”
- Contributions reduce employee income and reduce company payroll taxes.
For the Employee:
The Section 79 Permanent plan provides unmatched tax advantage and investment security*. Here are some of the key benefits:
- An immediate reduction of taxable income for plan participants reduces income and payroll taxes for participants.
- Allows tax-advantaged, contributions ranging from $5,000 up to $1,000,000+ per year.
- Plan grows tax-deferred.
- Unlike 401k plans, Section 79 Permanent plan provides penalty-free access to funds before age 59½.
- Accelerated death benefit for chronic or terminal illness.
- Includes a tax-free death benefit for surviving beneficiary(ies).
- Future Tax-free income distribution through policy loans.
* Each state has a central guarantee fund set aside by state insurance regulators to pay out claims to policyholders in the event an insurance company becomes insolvent. Similar to FDIC for bank accounts, the central guarantee funds are accumulated from regular assessments charged to operating insurance companies. If an insurance company is declared insolvent by the state courts, regulators recover the company’s remaining assets into the central guarantee fund and remaining policyholder claims are then paid out of the fund.