Section 79

An employer pays for $130,000 of group term life coverage for an executive under a nondiscriminatory Section 79 plan. The executive's tax consequence is:

1. A.Imputed income equal to the Table I cost of the $80,000 of coverage above $50,000Correct. Only the cost of excess coverage is taxed, at IRS table rates.
2. B.No taxable income, because employer premiums are always excludedWrong. The exclusion is capped at $50,000 of coverage.
3. C.$80,000 of taxable incomeWrong-but-tempting. The COVERAGE amount is not income - its Table I COST is.
4. D.Full taxation of all premiums paid by the employerWrong. The first $50,000 of coverage remains tax-free in a nondiscriminatory plan.

Why: Section 79 excludes the cost of the first $50,000 of group term coverage; the Table I cost of the remaining $80,000 of coverage is imputed to the executive as taxable income. Citation: IRC Sec. 79(a); Treas. Reg. 1.79-3 (Table I). Takeaway: tax-free to $50,000; imputed Table I cost above it.

To satisfy Section 79 nondiscrimination and standard group underwriting principles, the amount of group term life coverage for each employee must be determined by:

1. A.A nondiscretionary formula such as a salary multiple or position scheduleCorrect. Formula-based schedules preclude selection against the insurer.
2. B.Each employee's medical exam resultsWrong. Group coverage avoids individual medical underwriting.
3. C.The employer's case-by-case judgment per workerWrong. Ad hoc employer picks create discrimination problems.
4. D.Each employee's personal choice of any amountWrong. Unrestricted individual selection defeats group underwriting.

Why: Group underwriting requires benefit schedules based on nondiscretionary formulas such as earnings multiples or job classifications, preventing individual selection of amounts. Citation: IRC Sec. 79 nondiscrimination rules; group underwriting principles. Takeaway: formula-driven benefits, no individual selection.

Aisha's employer pays the full cost of $180,000 of group term life on her life under a nondiscriminatory plan. Using an IRS Table I rate of $1.20 per $1,000 of coverage per year for her age, how much imputed income must she report annually?

1. A.$0Employer-paid group term is tax free only up to $50,000 of coverage - amounts above that create imputed income.
2. B.$216This taxes the entire $180,000 (180 x $1.20), ignoring the Section 79 exclusion of the first $50,000.
3. C.$156Correct. Only the $130,000 above the $50,000 exclusion is taxable: 130 x $1.20 = $156.
4. D.$60This applies the rate to the excluded $50,000 (50 x $1.20) instead of to the taxable excess.

Why: Section 79 excludes the cost of the first $50,000 of employer-paid group term coverage. The taxable excess is $180,000 - $50,000 = $130,000, and 130 x $1.20 = $156 of imputed income per year.

Hollins Group pays the entire cost of group term life for its staff, but the plan gives its three owner-officers five times pay while everyone else receives one times pay, making it discriminatory under Section 79. For those owner-officers:

1. A.They report imputed income only on coverage above the first 50,000 dollars, exactly as the rank-and-file employees do.This applies the nondiscriminatory rule to a discriminatory plan. Once the plan discriminates in favor of key employees, those employees forfeit the exclusion entirely rather than keeping it for the first tier of coverage.
2. B.They lose the exclusion entirely and must include the greater of the actual cost or the Table I cost of all their coverage.A discriminatory Section 79 plan denies the exclusion to key employees, who must include the greater of actual cost or Table I cost for the full amount of their coverage; the comparison to actual cost prevents the table from understating the benefit.
3. C.The plan fails for everyone, so every employee must include the full cost of coverage in income.This spreads the penalty across the whole group. The discrimination penalty is targeted: non-key employees keep the exclusion, and only key employees lose it.
4. D.The employer loses its deduction for the premiums attributable to the owner-officers.This places the penalty on the employer's deduction. The Section 79 consequence of discrimination falls on the key employees' taxable income, while the employer continues to deduct the premium as reasonable compensation.

Why: Section 79's income exclusion for the first tier of employer-paid group term life is conditioned on the plan not discriminating in favor of key employees. When a plan does discriminate, the key employees alone lose the exclusion and must include in income the greater of the actual cost of their coverage or the Table I cost of all of it, not merely the excess. Rank-and-file participants keep the exclusion, and the employer's deduction for reasonable compensation is unaffected.