Many employers provide employees with employer-paid group-term life insurance benefits or arrange for employees to purchase group term life insurance benefits. But did you know that in some cases, if an employer pays for more than a $50,000 life insurance benefit, there can be tax implications for the employee?
Must the cost of employer-provided group-term life insurance be included in an employee’s gross income?
Pursuant to Internal Revenue Code (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”.
Can employees purchase group-term life insurance benefits with pre-tax dollars?
Yes, but only under a Code Section 125 cafeteria plan. Employees may purchase, with pre-tax dollars, up to $50,000 of group-term life insurance without having any “cost” of that coverage included in gross income. An employee may not use this exception if the employer has already provided up to $50,000 of employer-paid group- term life insurance benefits. In this case, amounts paid for the coverage through the cafeteria plan are excluded from employees’ income (regardless of the amount of coverage), but the cost of coverage in excess of $50,000 will be included in employees’ income based on the IRS’ Uniform Premium Table.
What tax withholding requirements apply to imputed income for group-term life insurance coverage in excess of $50,000?
Employers must include in their employees’ wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance on an after-tax basis. Employers should report the amount as wages in boxes 1, 3, and 5 of the employee’s Form W-2 and show it in box 12 with code “C.” The amount is subject to Social Security and Medicare taxes. An employer may, at its option, withhold federal income tax.
More information on group-term life insurance can be found in IRS Publication 15-B, which is available through www.irs.gov.
SB&K Benefits, LLC can provide more information and help you design a group life plan that meets your needs. Contact us a 832-482-2494 or email us through this website.