What Is a 79/22 Plan and How Does It Work?
Understand the structure of a 79/22 plan, an employer-sponsored strategy that leverages life insurance to offer key employees both a death benefit and tax-efficient funds.
A 79/22 plan is a supplemental benefit strategy that utilizes life insurance to provide employees with a death benefit and a source of potential retirement income. It is not a formal retirement plan, but a method of structuring life insurance to achieve specific financial outcomes for both the employee and the employer. The plan’s name is derived from the Internal Revenue Code (IRC) sections that govern the tax treatment of its components.
Plan Structure and Mechanics
A 79/22 plan is a strategy that combines two different types of life insurance under a group plan framework. The foundation of the arrangement is a group term life insurance policy. This component provides a pure death benefit, meaning it pays out to the beneficiaries only if the insured employee passes away during the policy’s term.
Paired with the term insurance is a permanent life insurance policy, such as whole life or universal life. This second policy is designed to build cash value over time, which is a central feature of the strategy intended to supplement the employee’s retirement savings.
The business pays the premiums for both insurance components on behalf of the participating employee. This employer-paid structure is a fundamental aspect of how the plan operates as a supplemental executive benefit.
Tax Implications for Employers and Employees
For the employer, the premiums paid for both the term and permanent life insurance policies are generally considered a business expense and are therefore tax-deductible. This allows the company to offer a significant benefit to personnel in a tax-advantaged manner.
The economic benefit of the term life insurance coverage above $50,000 is considered taxable income to the employee. This value is not the actual premium paid but is calculated using a specific formula from the IRS, known as Table I, which sets uniform premium rates based on age. Any employee contributions towards the cost of this insurance can offset the taxable amount.
The cash value that accumulates within the permanent life insurance policy grows on a tax-deferred basis. During retirement, the employee can typically access this accumulated cash value through policy loans, which are generally received income tax-free. Should the employee pass away, the death benefit from both the term and permanent policies is paid to their designated beneficiaries, and these proceeds are typically exempt from federal income tax under IRC Section 101.
The “79” in the plan’s name directly refers to IRC Section 79, which outlines the tax rules for group-term life insurance, including the $50,000 exclusion. The “22” is a marketing term and does not correspond to a specific IRC section that provides the plan’s benefits. The favorable tax treatment of the permanent policy’s cash value and death benefit is derived from general tax principles applicable to life insurance.