244 / Is term insurance provided to a group of fewer than 10 employees “group” term insurance?

Yes.

As a general rule, life insurance provided to a group cannot qualify as group term life insurance for income tax purposes unless, at some time during the calendar year, it is provided to at least 10 full-time employees who are members of the group of employees of the employer.

Insurance for fewer than 10 employees, however, may qualify as group term life insurance if:

(1)     it is provided for all full-time employees; and

(2)     the amount of protection is computed either as a uniform percentage of compensation or on the basis of coverage brackets established by an insurer under which no bracket exceeds 2½ times the next lower bracket and the lowest bracket is at least 10 percent of the highest bracket. Eligibility and amount of coverage may be based on evidence of insurability but determined solely on the basis of a medical questionnaire completed by the employee and not requiring a physical examination.¹ Additional voluntary medical information may not be made the basis of a premium rate determination.²

For the purposes of determining how many are included in a group, and if all of them are eligible, employees who elect not to receive insurance are considered included even if they would have to contribute toward the cost of term insurance. If an employee must contribute to the cost of benefits other than term insurance, such as permanent benefits, to get term insurance, the employee is not counted in determining if term life insurance is provided to 10 or more employees if the employee declined the term insurance.³

Although bona fide brackets that are temporarily empty probably do not disqualify a plan, a bracket not used since a plan’s inception the previous year was disregarded in one case with the result that protection provided in the bracket immediately above was more than 2½ times that provided in the bracket immediately below.⁴

If evidence of insurability is not a factor, then insurance not meeting the above requirements, which provides protection for fewer than 10 full-time employees, may nevertheless qualify if: (1) it is provided under a common plan to employees of two or more unrelated employers, and (2) insurance is restricted to, but mandatory for, all employees of an employer who belong to or are represented by a particular organization, such as a union that carries on substantial activities other than obtaining insurance.

Insurance for fewer than 10 full-time employees will not be disqualified merely because, under the terms of a policy, no insurance is provided for those employed less than six months or who are part-time employees, that is, whose customary employment is not more than 20 hours per week or five months in any calendar year, or those who are age 65 or older.⁵

For purposes of determining how many employees are provided insurance, all life insurance provided under policies carried by an employer is taken into account even if the policies are with different insurers.⁶ This gives support to the concept that supplemental coverage for fewer than 10 may be superimposed on an existing group term life insurance program covering more than 10 employees without taking into consideration the special requirements for groups of fewer than 10.⁷