December 31, 1963, section 79 prescribes the rules regarding the inclusion in an employee's gross income of an amount equal to the cost of group-term life insurance on his life which is provided under a policy carried directly or indirectly by his employer. Except as otherwise provided in section 79(b) and § 1.79-2, section 79 requires that an amount equal to the cost of group-term life insurance on an employee's life provided after December 31, 1963, for part or all of any taxable year of the employee ending after such date, under a policy (or policies) carried directly or indirectly by his employer (or employers) be included in his gross income to the extent that such cost exceeds the sum of (i) the cost of $50,000 of such insurance, and (ii) the amount (if any) paid by the employee toward the purchase of such insurance. Section 1.79-3 contains the rules applicable to the determination of the amount equal to the cost of group-term life insurance on the employee's life to which section 79 applies.

if

(3) If the proceeds of a policy of group-term life insurance on the life of an individual are payable to such individual or his beneficiary, and if the provisions of subparagraph (1) or (2) of this paragraph do not apply to such policy, then the determination of whether an amount is includible in the individual's gross income is made with regard to the provisions of section 61 (a) and the regulations thereunder. For example, group-term life insurance is provided on the life of the employee's spouse, or is not provided as compensation for personal services rendered as an employee, or is not provided under a policy carried directly or indirectly by the employee's employer, then subparagraphs (1) and (2) of this paragraph do not apply and the tax treatment shall be determined under section 61(a) and the regulations thereunder.

(b) Meaning of terms. The following terms are defined for purposes of section 79, this section, and §§ 1.79-2 and 1.79-3: (1) Group-term life insurance-(i) In general. Group-term life insurance is term life insurance protection provided under a master policy, or group of individual policies, which policy, or policies, constitute life insurance contracts for purposes of section 101(a) and form a part of a plan of group insurance as defined in subdivision (iii) of this subparagraph. Section 79 only applies to

insurance which provides general death benefits. Thus, such section does not apply to travel insurance or accident and health insurance (including amounts payable under a double indemnity clause or rider). Moreover, section 79 does not apply to any amount of life insurance protection provided for an employee by an employer which is in excess of the maximum amount of such protection which could, under the law of the applicable jurisdiction, be provided by such employer for such employee under a master policy providing only group-term life insurance protection.

(ii) Paid up or similar value. In the case of a policy which includes permanent insurance, a paid up value, or an equivalent benefit, section 79 shall apply to that portion of the insurance provided thereunder during the taxable year which constitutes group-term life insurance (within the meaning of this subparagraph) only if the policy specifies the portion of the premium which is properly allocable to the group-term life insurance and no part of the premium which is not so allocable is paid by the employer. For purposes of this subparagraph, a provision permitting an employee to convert (or continue) the term insurance protection after it ceases to be provided by the employer shall not be treated as permanent insurance, a paid up value, or an equivalent benefit. If a policy containing permanent insurance, a paid up value, or an equivalent benefit is used to provide group-term life insurance protection for any employee covered under the plan, each employee covered under the plan must be eligible for such insurance protection under a policy containing such a benefit.

(iii) Plan of group insurance defined. (a) To constitute a plan of group insurance, the plan must be arranged for by an employer for his employees. The provisions of the plan of the employer may be incorporated in a separate written document or may be incorporated in the master policy providing life insurance protection for the employees. For purposes of determining whether the requirements of this subdivision are satisfied, the plan of each employer is considered separately even though the policy which provides insurance protection for the employees covered under the plan also provides insurance protection for the employees of another employer. Furthermore, if the plan of one employer

does not satisfy the requirements of this subdivision. such failure to qualify does not affect the qualification of the plan of any other employer who provides his employees with group-term life insurance protection under the same policy.

(b) To constitute a plan of group insurance, the plan must make term life insurance available to a group of lives. Such group must include all of the employees of the employer, or, subject to the provisions of (d) of this subdivision, a class or classes of such employees the members of which are determined on the basis of factors which preclude individual selection. Examples of such factors are membership in a union whose members are employed by the employer, marital status, and age. A plan under which insurance is available only to employees who own stock in the employer corporation does not qualify as a plan of group insurance for purposes of section 79 since eligibility is not based primarily on the employment relationship. Furthermore, the coverage under the plan of the employer must in operation conform to the provisions relating to the eligibility of employees which are incorporated therein.

(c) To constitute a plan of group insurance, the amounts of insurance protection provided under the plan must be based upon some formula which precludes individual selection of such amounts. Thus, for example, the amounts of insurance on the lives of those individuals eligible for insurance under the plan must be based on a factor such as salary, years of service, or position, or a combination of such factors. (See (d) of this subdivision for requirement when a plan covers less than 10 employees.) The requirements of this subdivision do not prevent the use of a limited number of alternative schedules based upon the amount the employee elects to contribute, provided each such schedule satisfies the requirements of this subdivision independently.

(d) As a general rule, to constitute a plan of group insurance for a calendar year, an employer's plan must provide term insurance protection for at least 10 full-time employees at some time during a calendar year. However, a plan which, for an entire calendar year, provides protection for less than 10 full-time employees may also qualify as group insurance if the following requirements to preclude individual selection are met:

(1) The plan provides protection for all full-time employees (except as otherwise permitted in (d) (3) and (4) of this subdivision);

(2) Except as otherwise permitted in (d) (3) and (4) of this subdivision, the amount of protection for employees is computed either as a uniform percentage of salary or on the basis of coverage brackets (which are established by the insurer) under which no bracket exceeds 21⁄2 times the next lower bracket and the lowest bracket is at least 10 percent of the highest bracket;

(3) Evidence of insurability may be a factor affecting either the employee's eligibility for insurance or the amount of insurance on his life only to the extent that such eligibility or amount of insurance is determined solely on the basis of a medical questionnaire completed by the employee and not requireing a medical examination;

(4) If evidence of insurability is not a factor affecting either the employee's eligibility for insurance or the amount of insurance, then a plan which provides protection for less than 10 full-time employees but does not meet the requirements in (d) (1) or (2) of this subdivision may nevertheless qualify as a plan of group insurance if (i) such plan is a part of an overall plan which provides protection for the employees of two or more unrelated employers, (ii) participation in the plan 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), and (iii) such organization carries on substantial activities in addition to obtaining insurance.

For purposes of (d) of this subdivision, a plan shall be considered to be providing insurance protection for any employee who was eligible for such protection but who elected not to participate in the plan. Moreover, a plan of groupterm insurance providing insurance for less than 10 full-time employees will not be disqualified merely because employees are not provided term insurance under the plan because they are required, by the terms of the policy, to be employed for a waiting period of not more than 6 months before their insurance becomes effective, or are part-time employees. Employees whose customary employment is for not more than 20 hours in any one week, or 5 months in any calendar year, are presumed to be part-time employees.

(iv) Coverage of nonemployees. The determination as to whether the requirements of this subparagraph are satisfied is not affected by provisions of the plan which relate to individuals who are not employees as defined in subparagraph (2) of this paragraph.

(2) Employee. (i) The term "employee" has reference to the legal and bona fide relationship of employer and employee. For rules applicable to the determination of whether the employeremployee relationship exists, see section 3401(c) and the regulations thereunder. The term "employee" does not include any individual whose group-term life insurance protection is furnished by reason of his services as a self-employed individual even though such an individual may be treated as an employee under the terms of the policy. Thus, for example, if an individual had performed services for the employer as a "commonlaw" employee and such individual is currently performing services for the same employer as an independent contractor, the determination of whether the individual is an employee as defined in this subparagraph depends upon whether, under the terms of the plan for providing group-term life insurance protection on such individual's life, such individual's coverage is based upon his former services as an "employee" or upon his current services as a self-employed individual.

(ii) Full-time life insurance salesmen described in section 7701(a)(20) are included within the class of persons considered to be employees.

(3) Carried directly or indirectly. A policy of group-term life insurance on an employee's life is carried directly or indirectly by his employer if such employer pays directly or through another person any part of the cost of such insurance, or if such employer arranges for the payment of the cost of such insurance by the employees and charges less than the cost of such insurance, as determined under the provisions of § 1.79-3, to some employees (such as those in older age brackets) and more than the cost of such insurance to other employees (such as those in younger age brackets). The rule of the preceding sentence applies regardless of whether the employees who contribute more than the cost of such insurance are employees of the same employer or a different employer if the payment of the cost of such insurance is

(a) In general. (1) Section 79 (b) provides exceptions for the cost of groupterm life insurance provided under certain policies otherwise described in section 79(a). The policy or policies of group-term life insurance which are described in section 79(a) but which qualify for one of the exceptions set forth in section 79 (b) are described in paragraphs (b) through (d) of this section. Paragraph (b) of this section discusses the exception provided in section 79 (b) (1); paragraph (c) of this section discusses the exception provided in section 79 (b) (2); and paragraph (d) of this section discusses the exception provided in section 79 (b) (3).

(2) (1) If a policy of group-term life insurance qualifies for an exception provided by section 79(b), then the amount equal to the cost of such insurance is excluded from the application of the provisions of section 79(a).

(ii) If a policy, or portion of a policy of group-term life insurance qualifies for an exception provided by section 79(b), the amount (if any) paid by the employee toward the purchase of such insurance is not to be taken into account as an amount referred to in section 79 (a)(2). In the case of a policy or policies of group-term life insurance which qualify for an exception provided by section 79 (b) (1) or (3), the amount paid by the employee which is not to be taken into account as an amount referred to in section 79(a) (2) is the amount paid by the employee for the particular policy or policies of group-term life insurance which qualify for an exception provided under such section. If the exception provided in section 79(b) (2) is applicable only to a portion of the group-term life insurance on the employee's life, the amount considered to be paid by the employee toward the purchase of such portion is the amount equal to the excess of the cost of such portion of the insurance over the amount otherwise includible in the employee's gross income with respect to the group-term life insurance on his life carried directly or indirectly by such employer.

(ii) The rules of this subparagraph may be illustrated by the following example:

Example. A is an employee of X Corporation and is also an employee of Y Corporation, a subsidiary of X Corporation. A is provided, under a separate plan arranged by each of his employers, group-term life insurance on his life. During his taxable year, under the group-term life insurance plan of X Corporation, A is provided $60,000 of group-term life insurance on his life, and A pays $360.00 toward the purchase of such insurance. Under the group-term life insurance plan of Y Corporation, A is provided $65,000 of group-term life insurance on his life, but does not pay any part of the cost of such insurance. At the beginning of his taxable year, A terminates his employment with the X Corporation after he has reached the retirement age with respect to such employer, and the policy carried by the X Corporation qualifies for the exception provided by section 79 (b)(1). For that taxable year, the cost of the group-term life insurance on A's life which is provided under the plan of X Corporation is not taken into account in determining the amount includible in A's gross income under section 79(a), and A may not take into account as an amount described in section 79(a) (2) the $360.00 he pays toward the purchase of such insurance.

(b) Retired and disabled employees(1) In general. Section 79(b)(1) provides an exception for the cost of groupterm life insurance on the life of an individual which is provided under a policy or policies otherwise described in section 79(a) if the individual has terminated his employment (as defined in subparagraph (2) of this paragraph) with such employer and either has reached the retirement age with respect to such employer (as defined in subparagraph (3) of this paragraph), or has become disabled (as defined in subparagraph (4) (i) of this paragraph). If an individual who has terminated his employment attains retirement age or has become disabled during his taxable year, or if an employee who has attained retirement age or has become disabled terminates his employment during the taxable year, the exception provided by section 79(b) (1) applies only to the portion of the cost of group-term life insurance which is provided subsequent to the happening of the last event which qualifies the policy of insurance on the employee's life for the exception provided in such section.

(2) Termination of employment. For purposes of section 79 (b) (1), an individual has terminated his employment with an employer providing such individual

group-term life insurance when such individual no longer renders services to that employer as an employee of such employer.

(3) Retirement age. For purposes of section 79 (b) (1) and this section, the meaning of the term "retirement age" is determined in accordance with the following rules

(i) (a) If the employee is covered under a written pension or annuity plan of the employer providing such individual group-term life insurance on his life (whether or not such plan is qualifiled under section 401(a) or 403(a)), then his retirement age shall be considered to be the earlier of

(1) The earliest age indicated by such plan at which an active employee has the right (or an inactive individual would have the right had he continued in employment) to retire without disability and without the consent of his employer and receive immediate retirement benefits computed at either the full rate or a rate proportionate to completed service as set forth in the normal retirement formula of the plan, i.e., without actuarial or similar reduction because of retirement before some later specified age, or

(2) The age at which it has been the practice of the employer to terminate, due to age, the services of the class of employees to which he last belonged.

(b) For purposes of (a) of this subdivision, if an employee is covered under more than one pension or annuity plan of the employer, his retirement age shall be determined with regard to that plan which covers that class of employees of the employer to which the employee last belonged. If the class of employees to which the employee last belonged is covered under more than one pension or annuity plan, then the employee's retirement age shall be determined with regard to that plan which covers the greatest number of the employer's employees.

(ii) In the absence of a written employee's pension or annuity plan described in subdivision (1) of this subparagraph, retirement age is the age, if any, at which it has been the practice of the employer to terminate, due to age, the services of the class of employees to which the particular employee last belonged, provided such age is reasonable in view of all the pertinent facts and circumstances.

(iii) If neither subdivision (1) or (11) of this subparagraph applies, the retirement age is considered to be age 65.

(4) Disabled. (1) For taxable years beginning after December 31, 1966, an individual is considered disabled for purposes of section 79 (b) (1) and subparagraph (1) of this paragraph if he is disabled within the meaning of section 72(m) (7) and paragraph (f) of § 1.72– 17. For taxable years beginning before January 1, 1967, an individual is considered disabled for purposes of section 79 (b) (1) and subparagraph (1) of this paragraph if he is disabled within the meaning of section 213(g) (3), relating to the meaning of disabled, but the determination of the individual's status shall be made without regard to the provisions of section 213(g) (4), relating to the determination of status.

(ii) (a) In any taxable year in which an individual seeks to apply the exception set forth in section 79 (b) (1) by reason of his being disabled within the meaning of subdivision (i) of this subparagraph, and in which the aggregate amount of insurance on the individual's life subject to the rule of inclusion set forth in paragraph (a) (2) of § 1.79-1, but determined without regard to the amount of any insurance subject to any exception set forth in section 79(b), is greater than $50,000 of such insurance, the substantiation required by (b) or (c) of this subdivision must be submitted with the individual's tax return.

(b) For the first taxable year for which the individual seeks to apply the exception set forth in section 79(b) (1) by reason of his being disabled within the meaning of subdivision (i) of this subparagraph, there must be submitted with his income tax return a doctor's statement as to his impairment. There must also be submitted with the return a statement by the individual with respect to the effect of the impairment upon his substantial gainful activity, and the date such impairment occurred. For subsequent taxable years, the taxpayer may, in lieu of such statements, submit a statement declaring the continued existence (without substantial diminution) of the impairment and its continued effect upon his substantial gainful activity.

(c) In lieu of the substantiation required to be submitted by (b) of this subdivision for the taxable year, the individual may submit a signed statement issued to him by the insurer to the effect that the individual is disabled within the meaning of subdivision (i) of this paragraph. Such statement must set forth the basis for the insurer's deter

mination that the individual was so disabled, and, for the first taxable year in which the individual is so disabled, the date such disability occurred.

(c) Employer or charity a beneficiary (1) General rule. Section 79(b) (2) provides an exception with respect to the amounts referred to in section 79 (a) for the cost of any portion of the group-term life insurance on the life of an employee provided during part or all of the taxable year of the employee under which the employer is directly or indirectly the beneficiary, or under which a person described in section 170(c) (relating to definition of charitable contributions) is the sole beneficiary, for the entire period during such taxable year for which the employee receives such insurance.

(2) Employer is a beneficiary. For purposes of section 79 (b) (2) and subparagraph (1) of this paragraph, the determination of whether the employer is directly or indirectly the beneficiary under a policy or policies of groupterm life insurance depends upon the facts and circumstances of the particular case. Such determination is not made solely with regard to whether the employer possesses all the incidents of ownership in the policy. Thus, for example, if the employer is the nominal beneficiary under a policy of groupterm life insurance on the life of his employee but there is an arrangement whereby the employer is required to pay over all (or a portion) of the proceeds of such policy to the employee's estate or his beneficiary, the employer is not considered a beneficiary under such policy (or such portion of the policy).

(1) For

(3) Charity a beneficiary. purposes of section 79 (b) (2) and subparagraph (1) of this paragraph, a person described in section 170 (c) is a beneficiary under a policy providing groupterm life insurance if such person is designated the beneficiary under the policy by any assignment or designation of beneficiary under the policy which, under the law of the jurisdiction which is applicable to the policy, has the effect of making such person the beneficiary under such policy (whether or not such designation is revocable during the taxable year). Such a designation may be made by the employee with respect to any portion of the group-term life insurance on his life. However, no deduction is allowed under section 170, relating to charitable, etc., contributions