8785 / Do any nondiscrimination requirements apply to Section 79 plans?

Yes. If a Section 79 plan covers any key employees and the plan discriminates in favor of them either as to eligibility to participate or with respect to the kind or amount of benefits, the key employees may not exclude the cost of the first $50,000 of coverage (see Q 8782). If a plan is found to be discriminatory, the key employee must include the higher of the actual cost for such insurance or the cost as specified in the uniform premium Table I (see Q 8783). Employees who are not key employees may exclude the cost of $50,000 of coverage even if a plan is discriminatory.¹

A plan is considered discriminatory in favor of key employees with respect to eligibility to participate unless:

(1)  it benefits at least 70 percent of all employees;

(2)  at least 85 percent of participants are not key employees;

(3)  the plan benefits a class of employees found by the IRS not to be discriminatory; or

(4)  if the plan is part of a cafeteria plan, the requirements for cafeteria plans are met (see Q 8897).²

Individuals who do not need to be counted for the purposes of determining whether a plan is discriminatory include:

(1)  employees with fewer than three years of service;

(2)  part-time and seasonal employees;

(3)  employees excluded from a plan who are covered by a collective bargaining agreement if group-term life insurance was the subject of good faith bargaining, and

(4)  certain nonresident aliens.³

Benefits are discriminatory unless all benefits that are made available to key employee participants are available to all other participants.⁴ Benefits are not discriminatory if the plan provides a fixed amount of insurance that is the same for all covered employees or merely because the amount of insurance bears a uniform relationship to the total compensation of employees, or to their basic or regular rate of compensation.⁵ In other circumstances, the determination of whether a plan is nondiscriminatory will be based on all the facts and circumstances.⁶

For purposes of determining whether an employer’s group-term insurance plan is discriminatory, all policies providing group-term life insurance to a key employee or key employees carried directly or indirectly by an employer will be treated as a single plan. An employer may treat two or more policies that do not provide group-term life insurance to a common key employee as a single plan.⁷ See Q 8786 for a discussion of who are considered key employees for purposes of these nondiscrimination rules.

Exemption for Church Plans

The nondiscrimination requirements discussed above do not apply to church plans for church employees. A church plan generally is one established by a church or convention or association of churches that is tax-exempt under IRC Section 501(c)(3). A church employee includes a minister, or an employee of an organization that is tax-exempt under IRC Section 501(c)(3), but does not include an employee of an educational organization above the secondary level, other than a school for religious training, or an employee of certain hospitals or medical research organizations.⁸