Which Employees' Lives Are Covered?

April 13, 2006

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Once you've decided you want to offer life insurance, you need to decide which employees will get these benefits. You may want to offer group-term life insurance benefits to all your full-time employees, especially if you can get lower rates (and avoid individual medical exams) with a bigger group. If you only want to offer it as a special benefit to a few key employees, you won't be able to deduct the premiums for federal tax purposes, unless you can meet special nondiscrimination requirements.

Generally, nondiscrimination requirements are designed to discourage you from providing benefits only to the most highly compensated employees or providing benefits that limit lower compensated employees from participating because of the price of the benefits. In the case of group-term life insurance, a plan does not discriminate as to an employee's eligibility to participate if any of the following conditions are met:

The plan benefits at least 70 percent of all employees.
At least 85 percent of all participating employees are not key employees.
The plan benefits employees who qualify under a classification that is set up by the employer and found by the IRS not to discriminate in favor of key employees.

In the case of group-term life insurance, the most commonly offered type of employer-provided life insurance, you can offer life insurance to small sub-groups of employees if the distinctions are based on:

marital status
job duties
compensation
length of service
participation in a pension, profit-sharing, stock bonus, or accident and health plan
other employment-related factors

Warning

You cannot offer benefits to male employees only, for example, because you think they are the sole providers for their families while your female employees are not offered the benefits because you think they are not the sole providers.

Similarly, you cannot offer life insurance benefits only to employees who have families, while not extending the benefit to single employees or employees without children.

Generally, group-term policies are nondiscriminatory because the amount of insurance is consistently based on some multiple of each employee's compensation. If all the requirements are met, the cost of the premiums for the first $50,000 of group-term life insurance isn't included in the employee's gross income (for tax purposes). If the requirements aren't met, you can still provide the insurance, but the value of the insurance will be taxable compensation to the employee.

You can decide to offer life insurance to retirees, as well as active employees, if your business has retirees. This means that if you retire and the business continues, the business may be able to provide this benefit to you.

Once you've decided who gets the benefits, you'll need to decide what type of benefits you want to offer.