Why Section 79?
Section 79 has been known primarily as a way to provide term life insurance to groups of employees. What has been less well known is that Section 79 allows for permanent benefits to be provided as well. At the core of every Section 79 permanent benefit plan is a cash value life insurance contract. The tax implications for participating employees are dictated by the Regulations under IRS Code Section 79. Only specially designed life insurance contracts will produce favorable tax results under this formula. Since this is a strategy that uses life insurance, each participant should have a clearly identifiable life insurance need as well as qualify medically based on needed requirements.
Business owners are faced with multiple challenges:
• Protecting their family against financial loss in the event of a premature death
• The impact of taxes, both business and personal
• Planning for a secure retirement
• Recruiting, rewarding, and retaining executive talent
Fortunately, there’s a way that can help address these challenges……
…using permanent life insurance in conjunction with Section 79 of the Internal Revenue Code.
The Income Tax Advantage
For the Employer:
• Contributions to the plan are tax-deductible, assuming they constitute “reasonable compensation.”
For the Employee:
• Employees’ beneficiaries receive life insurance proceeds income tax-free2.
• Employees can be insured for up to $50,000 of life insurance at no cost to them.
• When permanent life insurance is elected, Employees include only a portion of each premium in income.
• Life insurance cash values accumulate tax-deferred.
• Once the plan is terminated, insurance policy loans and withdrawals can provide tax-free income, as long as the contract is kept in force and withdrawals do not exceed cost basis.
The Retirement Advantage
The foundation of a secure retirement is generally a qualified pension, profit sharing, or 401(k) plan. However, when the business owner has done all they are prepared to do with respect to qualified plans, a Section 79 permanent benefit plan can help.
• The plan provides permanent life insurance coverage.
• Policy cash values accumulate tax-deferred.
• If supplementary retirement income is needed, income tax-free policy loans may be taken by the participant.5
• Ultimately, policy death benefits can be used to supplement retirement income for a surviving spouse.
The Family Protection Advantage
Life insurance serves the critical function of protecting families against the financial consequences of a premature death. Money cannot replace a person, but it can compensate for the loss of income. Permanent life insurance purchased under a Section 79 plan can provide a financial safety net for the employee’s family in a number of ways:
• When permanent life insurance is used to fund the plan, it is designed to last for the employee’s lifetime
• Policy riders can be used to customize coverage and provide living benefits.
• Death benefits are received by beneficiaries income tax-free.
The Executive Benefit Advantage
A Section 79 permanent benefit plan offers a unique opportunity to recruit, reward, and retain executive talent. Ideally, qualified retirement plans provide the foundation for an executive benefit program. While
these plans offer exceptional tax benefits, they have their limitations:
• High costs for rank and file employees.
• Limits on contributions and
• Restrictions on when benefits can be received A Section 79 plan can help alleviate these limitations.
Employee Coverage
A Section 79 permanent benefit plan generally involves modest cost for rank and file employees. Because of the current income tax consequences for those electing permanent benefits – or term amounts in excess of
$50,000 – our experience shows that rank and file employees typically elect the option that involves no extra cost for them: $50,000 of group term insurance.
Section 79’ funded with permanent life insurance:
• Providing financial protection for families in the event of a premature death
• Helping to recruit, reward, and retain executive talent
• Lowering the impact of income taxes
• Supplementing retirement income
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