Many employers provide employees with employer-paid group-term life insurance benefits or arrange for employees to purchase group-term life insurance benefits. Internal Revenue Code (Code) Section 79 includes the tax rules for employer-provided group-term life insurance.
Code Section 79 provides that an employee may exclude up to $50,000 of employer-provided group-term life insurance coverage from his or her taxable income. This tax exclusion applies only to insurance on the life of the employee. It does not apply to insurance on the life of the employee’s spouse or dependent or other individual.
Employers may provide employees with group-term life insurance coverage in excess of $50,000, but the excess cost of coverage is taxable to the employee. This excess cost is taxable even if employees pay the insurance premiums for the coverage.
- The tax exclusion for employer-provided group-term life insurance coverage up to $50,000 applies only to insurance on the life of the employee.
- The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent is not taxable to the employee if the face amount of the coverage does not exceed $2,000.
Coverage in Excess of $50,000
- Employers must include the excess cost of group-term life insurance in employee wages for tax purposes.
- The amount is also subject to Social Security and Medicare taxes (FICA taxes).
- Employers may withhold federal income tax on the excess cost.
Commonly Asked Questions regarding Group Term Life Insurance
Must the cost of employer-provided group-term life insurance be included in an employee’s gross income?
Pursuant to Code Section 79, an employee may exclude up to $50,000 of employer-provided group-term life insurance from his or her income. This tax exclusion applies only to insurance on the life of the employee. It does not apply to insurance on the life of the employee’s spouse or dependent or other individual.
In addition, the employer may generally deduct the premiums it pays for the coverage as an ordinary and necessary business expense, so long as the employer is neither directly nor indirectly the beneficiary under the policy.
May the employer provide group term life insurance for its employees in excess of $50,000?
Yes. However, the “cost” of the coverage in excess of $50,000 must be included in the employee’s gross income. “Cost” as used here does not refer to the premium paid by the employer but to the cost determined under the Uniform Premium Table contained in IRS regulations. The “cost” of the coverage added to an employee’s gross income is commonly referred to as “imputed income.”
Group Term Life Insurance Links and Resources
Treasury Regulation Section 1.79-3 (Uniform Premium Table)
For More Information
For more information on how to educate your employees about life insurance, or help understanding the different types of life insurance, contact Next Generation Payroll today. You can also check out our resources on fully funded insurance, self-funded insurance, and even level funding insurance options. Although virtual health care is on the rise, that doesn’t change the fact that being fully insured can help lessen the cost of medical services. Reach out to Next Generation Payroll to learn more about how we can make fully funded insurance vs self funded easier for you to access and understand.
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