Group Term Life Insurance: Futa Taxable Payments?

Group term life insurance is a popular employee benefit, with 85% of organizations offering it and 98% of employees with access to the benefit enrolling. It is a type of insurance policy that covers a group of people, usually employees in a business, and pays out benefits to an employee's beneficiaries in the event of their death. However, it is important to note that employees will lose this coverage if they leave their job as the employer is the policyholder. As group term life insurance is considered a fringe benefit, there are tax implications associated with it. While the first $50,000 of coverage provided by an employer is typically excluded from taxable income, any amount exceeding this threshold becomes taxable income for the employee. This excess amount is subject to Social Security and Medicare taxes (FICA tax). Therefore, it is essential for both employers and employees to understand the tax consequences of group term life insurance when offered as part of a benefits package.

Group-term life insurance is a fringe benefit

According to the Internal Revenue Code (IRC) Section 79, the first $50,000 of group-term life insurance coverage provided by an employer is excluded from an employee's taxable income. This means that if the insurance coverage is $50,000 or less, there are no additional taxes for the employee to pay. This exclusion applies regardless of whether the employer pays the full cost of the coverage or whether the employee contributes towards it.

However, if the employer-provided group-term life insurance coverage exceeds $50,000, the additional amount becomes taxable for the employee. This is known as "imputed income," and it must be included in the employee's gross income for federal income tax and Federal Insurance Contributions Act (FICA) purposes. The imputed income amount varies based on the employee's age and is determined using the IRS Premium Table or Table I rates.

It is important to note that the determination of whether the group-term life insurance is taxable or not depends on whether the policy is considered "carried" by the employer. A policy is considered carried by the employer if they pay any cost of the insurance or if they arrange premium payments and subsidize the costs for employees.

Group-term life insurance coverage for an employee's spouse or dependents may also be offered as a benefit. If the employer-provided coverage for a spouse or dependent does not exceed $2,000, it is typically excluded from the employee's taxable income and is considered a de minimis fringe benefit.

Overall, group-term life insurance can be a valuable benefit for employees, but it is important to understand the tax implications, especially when the coverage exceeds certain thresholds.

The first $50,000 of coverage is excluded from taxable income

Group-term life insurance is a fringe benefit, which is a benefit that employers offer in addition to an employee's regular wages. It is a type of insurance policy that covers a group of people, usually employees in a business, rather than individuals. As a fringe benefit, there are tax implications for group-term life insurance.

The first $50,000 of group-term life insurance coverage provided by an employer is excluded from taxable income. This exclusion is outlined in Internal Revenue Code (IRC) Section 79, which applies to employer-sponsored group-term life insurance plans. This means that the cost of up to $50,000 of employer-provided group-term life insurance coverage is not included in the employee's gross income. This exclusion applies regardless of whether the employer pays the full cost of the insurance or whether the employee contributes to the premium payments.

The exclusion of the first $50,000 of coverage from taxable income provides a tax-free incentive for employees to enrol in group-term life insurance plans. This benefit is nontaxable according to the IRS's fringe benefit exclusion rules, which state that all or part of the value of certain fringe benefits can be excluded from an employee's pay. To qualify for this exclusion, the group-term life insurance coverage must meet certain requirements, including providing a general death benefit that is not included in the employee's income and being offered to at least 10 full-time employees.

If the employer-provided group-term life insurance coverage exceeds $50,000, the excess amount is included in the employee's taxable income. This additional coverage is considered a taxable fringe benefit, and the cost must be included in the employee's income using the IRS Premium Table. The imputed income for the excess coverage is subject to social security and Medicare taxes, also known as FICA tax. The employer must report the imputed income by the pay period, by the quarter, or on an annual basis, and it must be included in the employee's Form W-2.

Group-term life insurance for a spouse or dependent is taxable

Whether a benefit provided is considered de minimis depends on all the facts and circumstances. In some cases, an amount greater than $2,000 of coverage could be considered a de minimis benefit. For example, if an employee receives $40,000 of coverage per year under a policy carried directly or indirectly by their employer, and they are also entitled to $100,000 of optional insurance at their own expense, this amount is also considered carried by the employer. In this case, the cost of $10,000 of this amount is excludable, while the cost of the remaining $90,000 is included in income.

If the optional policy were not considered carried by the employer, none of the $100,000 coverage would be included in income. It's important to note that the determination of whether a benefit is taxable depends on various factors, including the specific facts and circumstances of each case.

Additionally, the taxation of group-term life insurance for spouses or dependents may vary depending on the state and local tax laws. Therefore, it is always advisable to consult with a tax professional or refer to the IRS website for the most accurate and up-to-date information regarding tax laws and regulations.

In conclusion, while the first $2,000 of group-term life insurance coverage for a spouse or dependent is generally not taxable, amounts exceeding this limit may be subject to taxation. The tax treatment of such benefits will depend on the specific circumstances and the applicable tax laws.

Employers must report imputed income by the pay period, quarter, or year

Group-term life insurance is a fringe benefit, which is a benefit that employers offer in addition to an employee's regular wages. It is a type of insurance policy that covers a group of people, usually employees in a business, rather than individuals.

The Internal Revenue Code (IRC) Section 79 governs employer-sponsored group term life insurance plans and provides an income exclusion of up to $50,000 of employer-provided group term life insurance coverage. This means that the first $50,000 of coverage provided by an employer is not considered taxable income for the employee and does not need to be reported.

However, if the employer provides group term life insurance coverage exceeding $50,000, the additional coverage amount is considered imputed income and must be included in the employee's taxable income. This imputed income is subject to social security and Medicare taxes, also known as FICA tax.

Employers must report this imputed income by the pay period, quarter, or year. The reporting must be included by December 31 of each year. The imputed income amount can be automated and built into the employer's payroll system for ease of administration.

The amount of imputed income varies based on the employee's age and is determined using the IRS Table I rates. The employer must calculate the imputed income for the entire year based on the employee's age on the last day of the calendar year.

For example, if an employee will turn 50 by the end of the calendar year and has $175,000 in GTL coverage paid for by the employer, there will be $125,000 in "excess coverage" (coverage exceeding $50,000). The imputed income for this employee would be calculated as follows:

$125,000 (excess coverage) x $0.23 (Table I rate for age 50) x 12 months = $345/year

This imputed income amount would then be reported on the employee's Form W-2 as wages, Social Security wages, and Medicare wages.

It is important to note that the imputed income for group-term life insurance is not subject to income tax withholding or FUTA withholding, but it is subject to FICA payroll taxes and withholding.

Employees can opt out of group-term life insurance

There are several reasons why an employee may want to opt out of group-term life insurance. One reason could be to avoid the imputed income amounts that are associated with employer-provided coverage. If the coverage exceeds $50,000, the excess amount is considered taxable income for the employee and is subject to social security and Medicare taxes. By opting out of the employer-provided coverage, employees can avoid having to pay additional taxes on their income.

Another reason an employee may want to opt out is if they feel the coverage is insufficient for their needs. Basic group-term life insurance policies typically provide coverage for one to two times the employee's annual salary, which may not be enough if the employee has dependents or significant financial obligations. In such cases, employees may prefer to purchase an individual policy with higher coverage limits.

Additionally, group-term life insurance policies are often not portable, meaning that if an employee leaves their job, they may not be able to take their policy with them. This could be another reason why an employee might choose to opt out and instead purchase an individual policy that is not tied to their employment.

Finally, some employees may opt out of group-term life insurance if they already have adequate coverage through another source, such as a spouse's policy or an individual policy they have purchased on their own.

While there are valid reasons for employees to opt out of group-term life insurance, it is important to note that this type of insurance can still offer valuable benefits. Employer-provided coverage is often guaranteed, convenient, and low-cost or free, making it an easy way for employees to obtain some level of financial protection for their loved ones. Ultimately, the decision to opt out should be made based on each employee's individual circumstances and needs.

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