What are the nondiscrimination tests for group term life insurance plans?1

What are the nondiscrimination tests for group term life insurance plans?1

Group term life insurance provided under the Trust that is subject to its own nondiscrimination provisions under Code Section 79(d) does not need to comply with the general VEBA tests, but must meet the Code Section 79 special standards for that benefit. The statue provides that a plan may not discriminate in favor of "key employees" with respect to eligibility or benefits. A plan will not meet the eligiblity nondiscrimination requirements for life insurance benefits unless one of the following tests is met: The plan must benefit 70% or more of all employees of the employer; At least 85% of all participants in the plan are non-key employees; The plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary of Treasury not to be discriminatory in favor of key employees; or The plan is part of a cafeteria plan and the requirements for cafeteria plans are met. A plan will not meet the benefits nondiscrimination requirements for life insurance benefits unless all benefits available to participants who are key employees are available to all other participants. Life insurance benefits will not be considered discriminatory merely because the benefits available bear a uniform relationship to the compensation of the employees covered. The dollar limit cap on compensation used to determine whether VEBA benefits are discriminatory does not apply to group life insurance plans. For purposes of this test, the term "employee" includes former employees.

What employees can be excluded from the Code Section 79 life insurance tests?

For purposes of the eligibility life insurance test, the following employees may be excluded: Employees who have not completed 3 years of service; Part-time or seasonal employees; Employees who are included in a collective bargaining unit where the plan has been the subject of good faith bargaining between employee representatives and the employer; and Employees who are nonresident aliens and who receive no earned income from the employer that constitutes income from sources within the United States.

Who is a "key employee"?

A "key employee" for purposes of the Code Section 79 life insurance nondiscrimination rules generally is an employee who is: An officer with an annual compensation greater than a dollar limit.6 The number of officer/key employees is limited to the greater of 3 or 10% of employees. In no event shall the number of officer/key employees be more than 50; An owner, directly or indirectly, of more than 5% of the employer; or An owner, directly or indirectly, or more than 5% of the employer and has an annual compensation from the employer of more than $150,000. A key employee also includes any former employee if such employee when he or she retired or separated from service was a key employee.

What happens to a life insurance plan that does not meet the Code Section 79 nondiscrimination testing requirements?

If the life insurance does not satisfy the nondiscriminationn requirements, the $50,000 worth of life insurance that otherwise would be provided on a tax-free basis instead will be includible in the income of the key employees benefiting under the life insurance plan.