This exclusion applies to life insurance coverage that meets all the following conditions.

1. It provides a general death benefit that is not included in income.
2. You provide it to a group of employees. See The 10-employee rule, below.
3. It provides an amount of insurance to each employee based on a formula that prevents individual selection. This formula must use factors such as the employee's age, years of service, pay, or position.
4. You provide it under a policy you carry directly or indirectly. Even if you do not pay any of the policy's cost, you are considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insurance. Determine the cost of the insurance, for this purpose, as explained in the discussion on coverage over the limit under Exclusion from wages, on page 10.

Group-term life insurance does not include the following insurance.

• Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death benefits.
• Life insurance on the life of your employee's spouse or dependent. However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. See De Minimis (Minimal) Benefits, earlier.
• Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year, such as paid-up or cash surrender value), unless certain requirements are met. See section 1.79-1(b) of the regulations for details.

Employee. For this exclusion, treat the following individuals as employees.

1. A current common-law employee.
2. A full-time life insurance agent who is a current statutory employee.
3. An individual who was formerly your employee under (1) or (2), above.
4. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction and control.

Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.

The 10-employee rule. Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year.

For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it.

Exceptions. Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance.

Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met.

1. If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that does not require a physical.
2. You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts.
3. You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets.

Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met.

1. You provide the insurance under a common plan covering your employees and the employees of at least one other employer who is not related to you.
2. The insurance is restricted to, but mandatory for, all your employees who belong to or are represented by an organization (such as a union) that carries on substantial activities besides obtaining insurance.
3. Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets.

To apply either exception, do not consider employees who were denied insurance for any of the following reasons.

1. They were 65 or older.
2. They customarily work 20 hours or less a week or 5 months or less in a calendar year.
3. They have not been employed for the waiting period given in the policy. This waiting period cannot be more than 6 months.

Exclusion from wages. You can generally exclude all group-term life insurance coverage you provide to an employee from the employee's wages subject to federal income tax withholding and federal unemployment tax. In addition, you can exclude the cost of up to $50,000 of coverage from wages subject to social security and Medicare taxes.

Exception for key employees. Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages subject to social security and Medicare taxes. You must also include the entire cost of the insurance in the employees' wages shown in boxes 1, 3, and 5 of Form W-2. However, you can exclude the cost of this insurance from the employees' wages subject to federal income tax withholding and federal unemployment tax.

This exception generally does not apply to church plans.

For this purpose, the cost of the insurance is the greater of the following amounts.

1. The premiums you pay for the employee's insurance.
2. The cost you figure using the table shown later under Coverage over the limit.

For this exclusion, a key employee during 2002 is an employee or former employee who is one of the following individuals. See section 416(i) for more information.

1. An officer having annual pay of more than $130,000.
2. An individual who for 2002 was either of the following:
1. A 5% owner of your business.
2. A 1% owner of your business whose annual pay was more than $150,000.

A former employee who was a key employee upon retirement or separation from service is also a key employee.

Your plan does not favor key employees as to participation if at least one of the following is true.

1. It benefits at least 70% of your employees.
2. At least 85% of the participating employees are not key employees.
3. It benefits employees who qualify under a set of rules you set up that do not favor key employees.

Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans.

When applying this test do not consider employees who:

1. Have not completed 3 years of service.
2. Are part time or seasonal.
3. Are nonresident aliens who receive no U.S. source earned income from you.
4. Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives.

Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay.

S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of all group-term life insurance coverage you provide the employee in the employee's wages subject to social security and Medicare taxes. You must also include the value of this coverage in the employee's wages shown in boxes 1, 3, and 5 of Form W-2. However, you can exclude the value of this coverage from the employee's wages subject to federal income tax withholding and federal unemployment tax.

Coverage over the limit. You must include in your employee's wages subject to social security and Medicare taxes the cost of group-term life insurance that is more than the cost of $50,000 of coverage, reduced by the amount the employee paid toward the insurance. Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, show it in box 12 with code C.

Former employees must pay the employee's part of social security and Medicare taxes on the cost of the excess coverage with their Form 1040. You are not required to collect these taxes. Report the uncollected social security tax with code M and the uncollected Medicare tax with code N in box 12 of Form W-2.

Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in the following table. Use the employee's age on the last day of the tax year. You must prorate the cost from the table if less than a full month of coverage is involved.

COST PER $1,000 OF PROTECTION
FOR ONE MONTH

Age	Cost
Under 25	$ .05
25 through 29	.06
30 through 34	.08
35 through 39	.09
40 through 44	.10
45 through 49	.15
50 through 54	.23
55 through 59	.43
60 through 64	.66
65 through 69	1.27
70 and older	2.06

You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of full months coverage at that cost.

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