Every employer group term life plan is governed by Section 79, but a marketed "Section 79 plan" usually means a group plan that also offers permanent (cash value) coverage, often pitched to owners as a way to move deductible dollars into personal cash value. The regulations allow permanent benefits only under strict conditions, and the employee is taxed on the cost of the permanent benefit each year. Plain group term life is simpler, cheaper and fits most small businesses; aggressively sold permanent designs have drawn IRS and court scrutiny.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
Basic group term: the standard
A normal group term life plan provides a death benefit and nothing else. The business deducts the premium, employees exclude the cost of the first $50,000 under Section 79, and coverage above that creates a small amount of imputed income using IRS Table I. See imputed income on group term life. For most small businesses, that is the right starting point.
What a "Section 79 plan" pitch looks like
The pitch usually goes like this: set up a group life plan for a small group, often heavily weighted to the owners, that includes a permanent policy with cash value. The business deducts the premiums, the owners report only a portion as income, and the cash value builds for the owners personally. Sometimes it is described as an alternative to a retirement plan.
Some versions are legitimate, carefully designed plans. Many are not. The rules are narrow, and the tax result is rarely as good as the illustration suggests.
What the regulations require for permanent benefits
Treasury Regulation 1.79-1 allows a group term policy to include permanent benefits only if, among other conditions:
- The policy or rider specifies the part of the death benefit that is group term life insurance;
- The group term amount is not reduced if the employee declines the permanent benefit; and
- The employee elects the permanent benefit in writing.
The employee then includes in income each year the cost of the permanent benefit, determined under a formula in the regulations, reduced by what the employee pays for it. The group term portion keeps its normal Section 79 treatment. The business still has to meet nondiscrimination rules, or key employees lose the $50,000 exclusion.
Groups with fewer than 10 employees
Groups under 10 employees: for life insurance to count as group-term life under Section 79 when fewer than 10 full-time employees are covered, IRS Publication 15-B and the regulations generally require that it go to all full-time employees (or all who pass any evidence of insurability), that amounts be a uniform percentage of pay or follow the carrier's brackets within IRS limits, and that any evidence of insurability be limited to an employee-completed medical questionnaire with no exam. Small-group carrier plans are usually built to fit these rules, but confirm the design with the carrier and your CPA.
Those small-group rules apply to ordinary group term coverage too, which matters for businesses with 2 to 9 employees. Carrier availability and favorable tax treatment are separate questions: a carrier may sell a design that does not get Section 79 treatment.
Why these plans draw scrutiny
- Discrimination: plans that mostly benefit owners can fail the nondiscrimination tests.
- Deduction limits: deductions must be ordinary and necessary compensation. If the business is effectively buying an asset for the owner, the deduction can be challenged.
- Surrender charges: permanent policies often have heavy early surrender charges, so an illustration that looks fine at year 20 can look poor at year 5.
- History: the IRS and courts have challenged a number of marketed arrangements that used life insurance inside employee benefit plans to generate deductions for owners, and penalties have followed in some cases.
If someone shows you a Section 79 plan, ask for an opinion from your own CPA (not the promoter's), the nondiscrimination testing, the surrender value schedule, and the year-by-year taxable income to each participant.
Better alternatives for owners who want permanent coverage
| Goal | Simpler tool |
|---|---|
| Cover the whole team cheaply | Basic group term life (plus voluntary life) |
| Permanent coverage for an owner-employee, paid by the business | Section 162 executive bonus |
| Permanent coverage for a key employee, with retention | REBA |
| Business wants its money back later | Split dollar |
| Tax-deferred retirement savings | A qualified retirement plan, then insurance for protection |
Frequently asked questions
Is every group life plan a Section 79 plan?
Technically yes: Section 79 is the tax code section for employer group term life. The marketing term "Section 79 plan" usually means a group plan that adds permanent, cash value coverage.
Are Section 79 plans legal?
Permanent benefits in a group term plan are allowed under Treasury regulations if strict conditions are met, and the employee is taxed on the cost of the permanent benefit. Plans that discriminate in favor of owners or overstate deductions can be challenged.
What is the best life insurance benefit for a small business?
For most businesses with 2 to 25 employees, basic group term life, often $25,000 to $50,000 or a salary multiple, plus optional voluntary life. Owners who want more can use individual policies or a Section 162 bonus.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.