[Federal Register Volume 64, Number 106 (Thursday, June 3, 1999)]
[Rules and Regulations]
[Pages 29788-29790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13833]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8821]
RIN 1545-AN54


Group-Term Insurance; Uniform Premiums

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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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 Sec. 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 
Sec. 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 of Group-term Life Insurance 
Protection.'' Sec. 1.79-3(d)(2). The group-term life insurance costs 
are calculated on a calendar month basis. Sec. 1.79-3 (a) through (c).
    Table I was initially published on July 6, 1966 (31 FR 9199), and 
was revised on December 6, 1983 (48 FR 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.\1\ The proposed table also added a new 
age 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.
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    \1\ The revised uniform premiums are based on mortality 
experience for individuals 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 the 
1985-89 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.
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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

[[Page 29789]]

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). 
Sec. 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

[[Page 29790]]

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


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


Sec. 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
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                                                              Cost per
                                                              $1,000 of
                    5-year age bracket                       protection
                                                               for one
                                                                month
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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
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* * * * *
    (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 Sec. 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 Sec. 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).
[FR Doc. 99-13833 Filed 5-28-99; 11:22 am]
BILLING CODE 4830-01-U