Publication 15 B - Employer'S Tax Guide To Fringe Benefits

For this rule, count employees who choose not to re-

participation or benefits, you must include the entire cost of

ceive the insurance unless, to receive it, they must contrib-

the insurance in your key employees’ wages subject to

ute to the cost of benefits other than the group-term life

social security and Medicare taxes. You must also include

insurance. For example, count an employee who could

the entire cost of the insurance in the employees’ wages

receive insurance by paying part of the cost, even if that

shown in boxes 1, 3, and 5 of Form W-2. However, you can

employee chooses not to receive it. However, do not count

exclude the cost of this insurance from the employees’

an employee who must pay part or all of the cost of

wages subject to federal income tax withholding and fed-

permanent benefits to get insurance, unless that employee

eral unemployment tax.

chooses to receive it.

This exception generally does not apply to church plans.

For this purpose, the cost of the insurance is the greater

Exceptions. Even if you do not meet the 10-employee

of the following amounts.

rule, two exceptions allow you to treat insurance as

group-term life insurance.

1) The premiums you pay for the employee’s insurance.

Under the first exception, you do not have to meet the

2) The cost you figure using the table shown later under

10-employee rule if all the following conditions are met.

Coverage over the limit.

1) If evidence that the employee is insurable is re-

For this exclusion, a key employee during 2002 is an

quired, it is limited to a medical questionnaire (com-

employee or former employee who is one of the following

pleted by the employee) that does not require a

individuals. See section 416(i) for more information.

physical.

1) An officer having annual pay of more than $130,000.

2) You provide the insurance to all your full-time em-

ployees or, if the insurer requires the evidence men-

2) An individual who for 2002 was either of the follow-

tioned in (1), to all full-time employees who provide

ing:

evidence the insurer accepts.

a) A 5% owner of your business.

3) You figure the coverage based on either a uniform

percentage of pay or the insurer’s coverage brack-

b) A 1% owner of your business whose annual pay

ets.

was more than $150,000.

Under the second exception, you do not have to meet

A former employee who was a key employee upon

the 10-employee rule if all the following conditions are met.

retirement or separation from service is also a key em-

ployee.

1) You provide the insurance under a common plan

Your plan does not favor key employees as to partici-

covering your employees and the employees of at

pation if at least one of the following is true.

least one other employer who is not related to you.

2) The insurance is restricted to, but mandatory for, all

1) It benefits at least 70% of your employees.

your employees who belong to or are represented by

2) At least 85% of the participating employees are not

an organization (such as a union) that carries on

key employees.

substantial activities besides obtaining insurance.

3) It benefits employees who qualify under a set of

3) Evidence of whether an employee is insurable does

rules you set up that do not favor key employees.

not affect an employee’s eligibility for insurance or

the amount of insurance that employee gets.

Your plan meets this participation test if it is part of a

cafeteria plan (discussed in section 1) and it meets the

To apply either exception, do not consider employees

participation test for those plans.

who were denied insurance for any of the following rea-

When applying this test do not consider employees

sons.

who:

1) They were 65 or older.

1) Have not completed 3 years of service.

2) They customarily work 20 hours or less a week or 5

2) Are part time or seasonal.

months or less in a calendar year.

3) Are nonresident aliens who receive no U.S. source

3) They have not been employed for the waiting period

earned income from you.

given in the policy. This waiting period cannot be

more than 6 months.

4) Are not included in the plan but are in a unit of

employees covered by a collective bargaining agree-

Exclusion from wages. You can generally exclude all

ment, if the benefits provided under the plan were

group-term life insurance coverage you provide to an em-

the subject of good-faith bargaining between you and

ployee from the employee’s wages subject to federal in-

employee representatives.

come tax withholding and federal unemployment tax. In

Your plan does not favor key employees as to benefits

addition, you can exclude the cost of up to $50,000 of

if all benefits available to participating key employees are

coverage from wages subject to social security and Medi-

also available to all other participating employees. Your

care taxes.

plan does not favor key employees just because the

Exception for key employees. Generally, if your

amount of insurance you provide to your employees is

group-term life insurance plan favors key employees as to

uniformly related to their pay.

Page 10

Publication 15 B - Employer'S Tax Guide To Fringe Benefits - 2002 Page 10

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