Alyssa Lane
The straddle rule is part of the Internal Revenue Code (IRC) and relates to group-term life insurance. It states that if an employer arranges for premium payments and the premiums paid by at least one employee subsidise those paid by at least one other employee, then the benefit is taxable even if the employees are paying the full cost they are charged. The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.
| Characteristics | Values |
|---|---|
| What is it? | The straddle rule is part of the Internal Revenue Code (IRC) and relates to group-term life insurance. |
| Who does it apply to? | Employers and employees. |
| What does it mean? | If an employer subsidises or redistributes the cost of group-term life insurance, this is a taxable benefit for employees. |
| What are the conditions? | The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost. |
| What is the benefit? | The cost of the first $50,000 of employer-provided group-term life insurance is generally excluded from the employee's imputed income. |
| What is the consequence? | If the rates straddle the Table I rates, this will result in imputed income for employees with rates below the Table I rate. |
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What You'll Learn
The 'straddle' rule and employer-paid group term life insurance
The straddle rule and employer-paid group term life insurance
The straddle rule is a term used to describe the situation in which the employer arranges for the premium payments of group term life insurance and the premiums paid by at least one employee subsidise those paid by at least one other employee. The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost. This is important because the employer is affecting the premium cost through its subsidising and/or redistributing role, and this creates a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged.
Section 79 of the Internal Revenue Code (IRC) provides an exclusion to the rule that anything that an employee receives from their employer as compensation for services counts towards their gross income. It stipulates that the cost of the first $50,000 of employer-provided group term life insurance is generally excluded from the employee's imputed income. However, 100% employee-paid group term Additional Life/Supplemental Life insurance and 100% employee-paid group term Voluntary Life insurance are subject to Section 79 if the rates are age-graded and 'straddle' Table I rates. This means that at least one employee's rate is lower than Table I rates and at least one employee's rate is equal to or higher. This will result in imputed income for employees with rates below the Table I rate.
Many employers and employees are taken by surprise upon discovering that a 100% after-tax, employee-paid supplemental plan can create imputed income if the plan's premium rates straddle the IRS uniform monthly premium rates. It is important to note that under certain circumstances, even a supplemental group term life insurance plan can be considered carried by the employer.
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How the 'straddle' rule affects imputed income
The straddle rule affects imputed income in the following ways:
The straddle rule states that if an employer arranges for the premium payments of group-term life insurance and the premiums paid by at least one employee subsidise those paid by at least one other employee, then there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged.
Section 79 of the Internal Revenue Code (IRC) provides an exclusion to this rule, stipulating that the cost of the first $50,000 of employer-provided group-term life insurance is generally excluded from the employee's imputed income. However, 100% employee-paid group-term Additional Life/Supplemental Life insurance and 100% employee-paid group-term Voluntary Life insurance are subject to Section 79 if the rates are age-graded and 'straddle' Table I rates.
A supplemental life insurance policy paid entirely by employees on an after-tax basis will be deemed "carried" by the employer, and therefore subject to Code Section 79, if the employer arranges for payment of the cost of the life insurance by its employees and the rates "straddle" the Table I rates. This will result in imputed income for employees with rates below the Table I rate.
The calculation and reporting of imputed income depend on whether the group-term life insurance plan is considered "discriminatory", how the premium is paid (employer-paid, employee-paid pre-tax, or employee-paid on an after-tax basis), and whether the plan is considered "carried" by the employer under Section 79 of the IRC and other corresponding regulations.
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The 'straddle' rule and employee-paid group term life insurance
The straddle rule and employee-paid group term life insurance
The straddle rule applies to group term life insurance plans where the employer arranges for the premium payments and the premiums paid by at least one employee subsidise those paid by at least one other employee. The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.
The straddle rule affects the calculation and reporting of imputed income. Imputed income is the amount of money that an employee receives from their employer as compensation for services, including fringe benefits. As a general rule, this counts towards their gross income under Internal Revenue Code (IRC) section 61, unless specifically excluded by some other IRC section.
Section 79 of the IRC provides an exclusion. It stipulates that the cost of the first $50,000 of employer-provided group term life insurance is generally excluded from the employee's imputed income. However, 100% employee-paid group term Additional Life/Supplemental Life insurance and 100% employee-paid group term Voluntary Life insurance are subject to Section 79 if the rates are age-graded and 'straddle' Table I rates. This means that at least one employee's rate is lower than Table I rates and at least one employee's rate is equal to or higher.
Many employers and employees are taken by surprise to discover that a 100% after-tax, employee-paid supplemental plan can create imputed income if the plan's premium rates straddle the IRS uniform monthly premium rates.
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The 'straddle' rule and discriminatory group term life insurance plans
The straddle rule and discriminatory group term life insurance plans
The straddle rule is a term used to describe a situation in which an employer arranges for premium payments for group term life insurance, and the premiums paid by at least one employee subsidise those paid by at least one other employee. The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.
The straddle rule is relevant to the taxation of group term life insurance plans. As a general rule, anything that an employee receives from their employer as compensation for services, including fringe benefits, counts towards their gross income under Internal Revenue Code (IRC) section 61, unless specifically excluded by some other IRC section. Section 79 of the IRC provides such an exclusion, stipulating that the cost of the first $50,000 of employer-provided group term life insurance is generally excluded from the employee's imputed income.
However, 100% employee-paid group term Additional Life/Supplemental Life insurance and 100% employee-paid group term Voluntary Life insurance are subject to Section 79 if the rates are age-graded and 'straddle' Table I rates. This means that at least one employee's rate is lower than Table I rates and at least one employee's rate is equal to or higher. In this case, the plan is considered "carried" by the employer, and the employees with rates below the Table I rate will have imputed income.
It is important to note that under certain circumstances, even a supplemental group term life insurance plan can be considered carried by the employer. This can result in imputed income for employees, even if the plan is 100% after-tax and employee-paid.
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The 'straddle' rule and fringe benefits
The straddle rule is a term used in relation to group-term life insurance. It applies when an employer arranges for the premium payments and the premiums paid by at least one employee subsidise those paid by at least one other employee. The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.
The straddle rule has implications for the calculation of imputed income. Imputed income is the value of non-cash compensation, or fringe benefits, that employees receive in addition to their salary. Under the Internal Revenue Code (IRC) section 61, anything that an employee receives from their employer as compensation for services, including fringe benefits, counts towards their gross income, unless specifically excluded by some other IRC section.
Section 79 of the IRC provides an exclusion for the cost of the first $50,000 of employer-provided group term life insurance. However, this exclusion does not apply if the rates are age-graded and 'straddle' Table I rates. In this case, the group term life insurance plan is deemed "carried" by the employer, and the employees with rates below the Table I rate will have imputed income.
It is important to note that under certain circumstances, even a supplemental group term life insurance plan can be considered carried by the employer. This can occur when the employer arranges for payment of the cost of the life insurance by its employees and the rates "straddle" the Table I rates. As a result, a 100% after-tax, employee-paid supplemental plan can create imputed income if the plan's premium rates straddle the IRS uniform monthly premium rates.
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Frequently asked questions
The straddle rule is when an employer arranges for the premium payments of group-term life insurance and the premiums paid by at least one employee subsidise those paid by at least one other employee.
Group-term life insurance is when an employer pays the cost of the life insurance.
The benefit of the straddle rule is that there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged.
IRC stands for Internal Revenue Code. Section 79 of the IRC stipulates that the cost of the first $50,000 of employer-provided group term life insurance is generally excluded from the employee's imputed income.
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