Rev. Rul. 54-165

Advice is requested whether employer contributions towards premiums for the purchase of employees' group term life insurance is includible in the gross income of the benefited employees where the insurance policies, under certain circumstances, may be converted by the individual employees into permanent types of life insurance.

In accordance with the provisions of the group term life insurance policy in the instant case the amount of insurance on the life of each employee is determined by the employee's basic rate of pay. The insurance premiums are paid for by contributions from both employer and employee. The insurance is group term life insurance, containing a permanent total disability provision. An employee who terminates his employment is entitled to have issued to him, without evidence of insurability, an individual policy of life insurance without disability or other supplemental benefits, on which he must pay the premiums. Such employee may date his individual policy as of the effective date of his insurance under the group policy, provided he pays the differences between the amount of premiums paid under the group policy and the premiums that would have been due under the individual policy, with interest, or the cash value of the individual policy, whichever is greater.

Section 39.22(a)-3 of Regulations 118, relating to compensation paid other than in cash, provides in part that premiums paid by an employer on policies of group life insurance covering the lives of his employees, the beneficiaries of which are designated by the employees, are not income to the employees.

The tax consequence of the purchase of group life insurance are set forth in Mim. 6477, C.B. 1950-1, 16. Under the provisions of section 29.22(a)-3 of Regulations 111 (now section 39.22(a)-3 of Regulations 118) as interpreted by Mim. 6477, supra , premiums paid by an employer on policies of group term insurance covering the lives of his employees are not income to the benefited employees. Premiums paid by an employer for permanent forms of insurance on the lives of his employees under group permanent life insurance policies constitute income to the employees, except that under paragraph 5 of Mim. 6477, supra , such premiums do not constitute income if the employees' right to permanent insurance, or equivalent benefits, other than current term insurance, is forfeitable in case of subsequent separation from service. The question presented is whether the provisions of paragraph 5 of Mim. 6477, supra , apply in the instant case in view of the fact that the benefited employees have, under the terms of the policy, the right on termination of employment to convert the policies into permanent types of life insurance.

The facts in the case presented lead to the conclusion that the premiums paid by the employer only provide current insurance protection and that the costs of any permanent or nonforfeitable features of the policy are borne by the employees.

It is held that where the premiums required to purchase group term life insurance for employees are paid out of contributions from both employer and employees and the payments made by the employer provide only current insurance protection, the amounts paid by the employer are not includible in the gross income of the benefited employees notwithstanding the fact that the insurance policies permit conversion, under certain circumstances, into permanent types of life insurance.