Group-Term Insurance; Uniform Premiums

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8821] RIN 1545-AN54

TITLE: 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 §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 §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 The revised uniform premiums
are based on mortality experience for individuals 1 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 the1985-89 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.

of Group-term Life Insurance Protection." §1.79-3(d)(2). The group-
term life insurance costs are calculated on a calendar month basis.
§1.79-3 (a) through (c).

Table I was initially published on July 6, 1966 (31 F R 9199), and
was revised on December 6, 1983 (48 F R 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. The
proposed table also added a new age 1 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.

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 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). §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 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 §1.79-1, paragraph (d)(7)
is revised to read as follows:

§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 x $300)................. 150
(3) Line (1) minus line (2).............................. 200
(4) Cost of $70,000 of group-term 
life insurance under Table I of §1.79-3.................. 126
(5) Cost of $50,000 of group-term 
life insurance under Table I of §1.79-3................... 90
(6) Cost of group-term insurance 
in excess of $50,000 (line (4) minus line(5))............. 36
(7) Amount considered paid 
by A for group-term life insurance (70 x $2)..............140
(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:

§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
__________________________________________________________________

5-year age bracket Cost per $1,000 of 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 §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 §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)

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