Section 79 Plan Life Insurance in 2026: How It Works for Business Owners and Key Employees

A Section 79 plan is a tax-advantaged executive benefit built on group-term life insurance. Under Internal Revenue Code §79, employers can provide up to $50,000 of group-term coverage to employees tax-free, and layers of permanent coverage can be added for selected key employees through a “carve-out” design. For business owners looking to reward and retain top talent without the cost and complexity of a full qualified retirement plan, a Section 79 plan is one of the most flexible tools available in 2026.

This guide explains what a Section 79 plan is, how the tax rules work, how the coverage is structured, what it costs, and when it makes sense for a small business. We also compare it to other executive benefit vehicles so you can see where it fits in a broader compensation strategy.

What Is a Section 79 Plan?

Section 79 of the Internal Revenue Code governs the tax treatment of employer-provided group-term life insurance. In its simplest form, it says the first $50,000 of employer-paid group-term coverage is excluded from an employee’s taxable income. Anything above $50,000 is taxed to the employee using a government-set rate table (IRS Table I), which is generally far below the actual cost of the coverage.

The term “Section 79 plan” usually refers to an enhanced design: an employer provides a base of group-term coverage to all employees, then “carves out” a select group of key employees and layers permanent, cash-value life insurance on top of their group-term certificate. The result is generous, tax-favored coverage for owners and executives that is still anchored by a broad-based employee benefit.

How the §79 Tax Rules Work

Two mechanics drive the tax efficiency of a Section 79 plan. First, the $50,000 exclusion: the value of the first $50,000 of group-term coverage the employer provides is not counted as income to the employee. Second, the Table I imputed income: for coverage above $50,000, the employee is taxed on the government’s uniform premium rate rather than the carrier’s actual premium. Because Table I rates are typically lower than commercial rates, the employee receives meaningful coverage while paying tax on only a modest imputed amount.

The employer’s premium payments for the group-term layer are generally deductible as a business expense, and the death benefit is paid to the employee’s beneficiaries free of income tax. That combination — deductible premiums for the business, tax-free benefits for the family — is what makes Section 79 attractive.

Section 79 vs Other Executive Benefit Plans

A Section 79 plan is one of several ways to deliver executive benefits. Here is how it compares to the most common alternatives.

Plan Type	Employer Deduction	Employee Taxation	Who It Covers	Best For
Section 79 (group-term + permanent)	Yes, on premiums	Table I imputed income above $50K	Selected key employees	Discriminatory executive coverage
Section 162 Executive Bonus	Yes, if structured properly	Premium is taxable income to employee	Any select individual	Simple, flexible one-off benefit
Deferred Compensation (409A)	When benefits are paid	At distribution	Select executives	Supplemental retirement income
Group-Term Life Only	Yes	$50K excluded, excess imputed	All eligible employees	Basic low-cost employee benefit

Unlike a qualified 401(k) plan, a Section 79 plan is not subject to the same non-discrimination testing as retirement plans, which means an employer can legally provide richer benefits to a chosen group of executives. That flexibility is its central appeal — and the reason it is often described as “discriminatory” in the technical sense of favoring key employees.

Who Qualifies as a Key Employee?

Section 79’s special tax treatment for permanent carve-out coverage depends on the plan avoiding discrimination in favor of “key employees.” At a high level, a key employee is an employee who, in the prior plan year, met any of the following criteria:

• An officer earning above a threshold indexed annually (approximately $220,000 for 2026);
• An employee owning more than 1% of the business and earning more than $150,000; or
• An employee owning more than 5% of the business.

Small, closely held businesses often qualify because the owner and a handful of executives fall into these categories. Advisory fees and plan design matter here, so most employers work with a benefits attorney and a broker who specializes in executive carve-out plans.

How a Section 79 Carve-Out Plan Is Structured

A typical Section 79 plan layers three pieces together. The base layer is broad-based group-term life insurance for all employees, which keeps the plan compliant and delivers a real benefit to the rank and file. The middle layer is additional group-term coverage for selected key employees, taxed at Table I rates. The top layer is permanent, cash-value life insurance — often indexed universal life — assigned to the key employee under a carve-out arrangement.

Crucially, the permanent layer is funded by the employer but structured so that the executive receives the bulk of the long-term value. Over time, the executive may take increasing ownership of the policy, building a tax-deferred asset that can supplement retirement income. The employer recovers its outlay through a series of planned distributions, and the death benefit ultimately passes to the executive’s family.

Estimated Costs and Typical Coverage Amounts

Section 79 plan costs are driven by the age and health of the insured executives, the amount of permanent coverage, and the size of the group-term base. The table below shows representative annual premium figures for a carve-out plan covering a small management team.

Component	Typical Coverage	Annual Cost Driver
Base group-term (all employees)	1× salary, to $50,000	Low — a few dollars per employee per month
Supplemental group-term (key employees)	Additional $200K–$500K	Age-banded Table I rates
Permanent carve-out layer (owner)	$500K–$2M IUL	$15,000–$60,000+ per year, age-dependent
Plan administration	Documentation + testing	$2,000–$5,000 setup, plus annual review

Because the permanent layer dominates the cost, age of the key employees is the single biggest factor. A 45-year-old owner can fund substantially more coverage per dollar than a 60-year-old. Employers typically review the plan annually to confirm the funding remains on track.

Advantages of a Section 79 Plan

Business owners choose Section 79 plans for several reasons, and understanding them helps clarify whether the structure fits your goals.

• Tax-favored benefits: The first $50,000 of group-term coverage is income-tax-free, and the death benefit is paid to beneficiaries free of income tax.
• Employer deductibility: Premiums paid for the group-term layer are generally deductible business expenses.
• Selective coverage: Unlike qualified plans, Section 79 lets an employer favor key employees without the same non-discrimination testing.
• Retention and reward: A generous executive benefit helps recruit and keep top talent in a tight labor market.
• Cash-value potential: The permanent layer can grow tax-deferred, giving executives a supplemental retirement asset.

Drawbacks and Compliance Considerations

Section 79 plans are powerful but not simple. Before implementing one, weigh these important caveats:

• Not favorable for every product: Fully loaded whole life can trigger the §79 rules in ways that create tax headaches; non-whole-life products are usually the better fit.
• Administrative burden: Plans require documentation, annual testing, and Table I reporting.
• Imputed income: Key employees still pay tax on coverage above $50,000, which must be reported on their W-2.
• Long-term commitment: The permanent layer needs consistent funding to work as designed.
• Professional guidance required: This is not a do-it-yourself benefit — attorneys and specialists should be involved.

Steps to Set Up a Section 79 Plan

If you are considering a Section 79 carve-out plan for your business, the process follows a predictable path.

1. Define your goals. Decide which executives you want to reward and what benefit amount is meaningful.
2. Engage specialists. Work with a benefits attorney and an experienced executive-benefit broker.
3. Design the carve-out. Choose the base group-term layer, the supplemental layer, and the permanent product.
4. Run the numbers. Model the tax impact, the imputed income, and the long-term policy funding.
5. Document the plan. Formalize the arrangement so it satisfies §79 requirements.
6. Fund and review. Implement funding and revisit annually to stay on track.

Watch: How Executive Life Insurance Benefits Work

Frequently Asked Questions About Section 79 Plans

What is a Section 79 plan in simple terms?

A Section 79 plan is an executive benefit built on employer-provided group-term life insurance. The first $50,000 of coverage is tax-free to the employee, and additional permanent coverage can be carved out for selected key employees under IRS Code §79.

Is a Section 79 plan tax-deductible for the employer?

Generally yes — premiums paid for the group-term layer are treated as a deductible business expense. The permanent carve-out layer has more nuanced treatment, which is why professional plan design and tax counsel are essential.

Who is eligible for a Section 79 plan?

Employers can extend group-term coverage broadly and carve out a select group of key employees — typically officers, significant owners, or highly compensated employees — for the permanent layer. Eligibility rules are set by the plan document within the bounds of §79.

How much group-term life insurance is tax-free under §79?

The first $50,000 of employer-provided group-term coverage is excluded from the employee’s gross income. Coverage above $50,000 is taxed to the employee using IRS Table I imputed rates, which are typically lower than commercial premiums.

Can a small business use a Section 79 plan?

Yes. Closely held businesses are among the most common users, because the owner and a few executives typically qualify as key employees. Small plans still require careful documentation and annual administration.

Is a Section 79 plan better than a 401(k)?

They serve different goals. A 401(k) is a broad, tax-deferred retirement savings vehicle for all employees. A Section 79 plan is a targeted executive benefit that provides permanent death benefit protection and cash value. Many employers offer both.

Related Resources

• Life Insurance and Disability Planning for Executives
• Executive Disability Insurance Guide
• Buy-Sell Agreement Life Insurance for Business Owners
• U.S. Code §79, Group-Term Life Insurance Purchased for Employees
• IRS Publication 525: Taxable and Nontaxable Income
• AM Best: Verify a Carrier’s Financial Strength

Talk to a Specialist About Your Executive Benefit Plan

A Section 79 plan can deliver permanent, tax-favored life insurance to the executives who drive your business — but only if it is designed and administered correctly. Compare executive life insurance options and get a free quote from 50+ top-rated carriers, and let an independent specialist show you exactly how a Section 79 carve-out would work for your team in 2026.

A Section 79 carve-out keeps the policy with the employer; an executive bonus plan transfers ownership to the executive. Compare the after-tax cost of both before you choose a structure.