What are the non-discrimination requirements for life insurance?
Non-discrimination requirements ensure that employers are offering benefits fairly to all employees.
Defining Key Employees
The IRS Guidelines define Key Employees as any of the following:
- Officers of the company with gross compensation in excess of $180,000 or
- Employees of the company in the current year who:
- Own 5% or more of the company (IRS family stock attribution rules apply) in the current or previous year, or
- Own 1% of the company (IRS family stock attribution rules apply) whose annual pay is more than $150,000.
Non-Discrimination Compliance
Employers can selectively offer life insurance only to Key Employees, but they cannot deduct the employee premiums from their federal taxes, unless they meet the non-discrimination requirements.
To comply with non-discrimination requirements, the plan must meet the following standards:
- The plan must benefit at least 70 percent of the company's employees.
- At least 85 percent of all employees who participate in the plan must not be highly-compensated or Key Employees.
- The plan must benefit employees who qualify under a classification that is set up by the employer and found by the IRS not to discriminate in favor of Key Employees.