Group Life Insurance: Taxable Or Not?

Group term life insurance is a common benefit provided by employers. It is a life insurance policy that covers a group of people, often offered as part of an employee benefits package. Generally, anything that an employee receives from their employer as compensation, including fringe benefits such as life insurance, is included in the employee's gross income unless a specific Internal Revenue Code (IRC) exclusion applies. So, is group life insurance taxable?

Group life insurance is taxable when the coverage amount exceeds $50,000

Group term life insurance is a common benefit provided by employers. It is a life insurance policy that covers a group of people, often offered as part of an employee benefits package. While the premiums for this coverage are typically paid by the employer, group term life insurance can become a taxable benefit when the coverage amount exceeds $50,000.

The Internal Revenue Service (IRS) considers group-term life insurance provided by an employer to be a tax-free benefit as long as the policy's death benefit is less than $50,000. This means that there are no tax consequences if the group-term policy does not exceed this coverage amount. However, if the employer-provided coverage is higher than $50,000, the excess amount is considered taxable income for the employee. This is because the IRS treats the value of the premiums paid by the employer as “imputed income” when the coverage exceeds $50,000.

The taxable amount of the group term life insurance is reported on the employee's W-2 tax form at the end of the year. Specifically, the total cost of any group insurance that was in excess of $50,000 and, therefore, taxable, will appear in box 12c of the W-2 form. This amount will also be included in the employee's income for boxes 1, 3, and 5. Additionally, the employee is responsible for federal, state, and local taxes on this amount, as well as the associated Social Security and Medicare taxes.

It is important to note that the calculation of imputed income for tax purposes is based on the IRS's imputed income premium table, which takes into account the age of the employee and the amount of coverage provided. The table determines the cost of excess coverage, and this cost is then included in the employee's taxable income.

To summarise, group term life insurance is a valuable benefit offered by employers, but it becomes a taxable benefit when the coverage amount exceeds $50,000. In such cases, the excess coverage is treated as taxable income for the employee, and the tax implications should be carefully considered.

This is considered a non-cash fringe benefit

Group term life insurance is a common benefit provided by employers. It is essentially a life insurance policy that covers a group of people, often offered as part of an employee benefits package. The coverage can also be extended to employees' spouses or dependents.

Group term life insurance is tax-free for the employee up to a certain amount. If the employer-provided coverage is greater than $50,000, the excess amount is considered a non-cash fringe benefit, and the premiums for that extra coverage become taxable income for the employee. This is because the IRS considers group-term life insurance provided by an employer to be a tax-free benefit as long as the policy's death benefit is less than $50,000. Therefore, there are no tax consequences if the group-term policy does not exceed $50,000 in coverage.

The first $50,000 of group term life insurance coverage that an employer provides is excluded from taxable income and doesn't add anything to the employee's income tax bill. However, the employer-paid cost of group term coverage in excess of $50,000 is taxable income for the employee. This amount is included in the taxable wages reported on the employee's Form W-2, even though they never actually receive it. It is considered "phantom income".

The amount shown on the employee's paycheck or pay stub for group term life insurance represents the taxable benefit. At the end of the year, the employer will provide a W-2 form that reports the total cost of any group insurance received that was in excess of $50,000 and is, therefore, taxable. This amount will appear in box 12c of the W-2 and will also be included in the income for boxes 1, 3, and 5.

The IRS has a table in its "Publication 15-B: Employer's Tax Guide to Fringe Benefits," that employers can use to determine the cost of excess coverage, based on the worker's age. For example, if an employee is 45 years old, their premiums would be calculated at 15 cents per month (or $1.80 a year) for every $1,000 in coverage. The first $50,000 of coverage isn't taxed, so if they had $200,000 in total coverage, they would be taxed on the cost of $150,000 in coverage, or $270 for the full year ($1.80 x $150,000). However, they may have already paid a portion of that cost through payroll deductions, and only the remaining amount would be included in their taxable income.

The first $50,000 of coverage is tax-free

Group term life insurance is a common benefit provided by employers. It is a life insurance policy that covers a group of people and is often offered as part of an employee benefits package. The coverage may also be extended to employees' spouses or dependents.

The first $50,000 of group term life insurance coverage provided by an employer is excluded from taxable income. This means that it is tax-free for the employee and does not add anything to their income tax bill. The IRS considers group-term life insurance provided by an employer to be a tax-free benefit as long as the policy's death benefit is less than $50,000. Therefore, there are no tax consequences if the group-term policy does not exceed $50,000 in coverage.

However, if the coverage provided by the employer is higher than $50,000, the additional amount is considered taxable income for the employee. The cost of the insurance in excess of $50,000 is included in the employee's gross income for federal income tax purposes. This is known as "phantom income" because it is taxed even though the employee does not actually receive it directly. The amount is reported as wages in box 1 of Form W-2 and is also shown separately in box 12 with code C.

The tax implications of employer-provided group term life insurance can be complex, and it is important for employees to understand how it may impact their overall tax liability. It is also worth noting that the tax treatment of group term life insurance may vary depending on the specific circumstances and the applicable tax laws.

The cost of group term insurance must be determined using an IRS table

Group term life insurance is generally included in an employee's gross income and is taxable unless a specific Internal Revenue Code (IRC) exclusion applies. IRC Section 79 provides an exclusion of up to $50,000 of employer-provided group term life insurance coverage. This means that if the total amount of coverage does not exceed $50,000, there are no tax consequences. However, if an employee receives more than $50,000 of coverage, the excess amount is considered taxable income and must be included in the employee's gross income for federal income tax and Federal Insurance Contributions Act (FICA) purposes.

The cost of group term insurance in excess of $50,000 must be determined using the IRS Premium Table, also known as the IRS Imputed Income Premium Table. This table takes into account the age of the employee and the amount of coverage to determine the imputed income value. The imputed income value represents the taxable portion of the premiums for coverage that exceeds the $50,000 exclusion.

For example, consider an employee who is 47 years old and has a group term life insurance policy with a death benefit of $150,000, which is paid entirely by the employer. Using the IRS table, this employee falls into the 45- to 49-year-old age range and incurs a cost of 15 cents per $1,000 in coverage. The excess coverage is calculated as $150,000 minus the $50,000 exclusion, resulting in $100,000. The monthly imputed income is then calculated by multiplying the excess coverage by the cost per $1,000 in coverage: ($100,000 / $1,000) x 0.15 = $15. This amount of $15 is the monthly taxable income for the employee, which is then added to their W-2 tax form at the end of the year.

The IRS Premium Table is used to ensure a consistent and fair calculation of the taxable portion of group term life insurance coverage. It is important for employers to correctly calculate and report this information to comply with tax regulations and avoid undervaluing the amount of taxes their employees must pay. By using the IRS table, employers can determine the imputed income value, which represents the cost of the insurance coverage that is taxable for the employee.

The amount of taxable income attributed to an older employee is often higher than the premium they would pay for an individual policy

Group term life insurance is a common benefit provided by employers. It is essentially a life insurance policy that covers a group of people, often offered as part of an employee benefits package. While the first $50,000 of coverage is tax-free for the employee, any amount over this is considered taxable income. This is known as "imputed income" and must be included in the employee's W-2 tax form. The cost of group term insurance is determined using a table prepared by the IRS, and this amount is included in the employee's taxable wages, even though they do not actually receive it. This is often referred to as "phantom income".

As an older employee, the amount of taxable income attributed to you is often higher than the premium you would pay for an individual policy. This is because the cost of group term insurance is based on the IRS table, which takes into account the employee's age. The older an employee is, the higher the cost of their insurance, and therefore the higher the taxable income. Additionally, as an employee's compensation increases, so does the amount of taxable income.

For example, let's consider an older employee with a basic life insurance policy provided by their employer, with a death benefit of $150,000. Using the IRS table, this employee would fall into the 45- to 49-year-old range and incur a cost of 15 cents per $1,000 in coverage. The excess coverage, which is the amount over $50,000, would be $100,000. The monthly imputed income would then be calculated as ($100,000 / $1,000) x 0.15 = $15. This amount would be included in the employee's taxable income and reported on their W-2 form.

The tax cost of employer-provided group term life insurance can be higher than desirable, especially for older employees. In such cases, it is worth considering alternative options such as "carve-out" plans or individual policies. For instance, an employer can provide $50,000 of group term insurance, which is tax-free, and then offer an individual policy for additional coverage. Alternatively, the employer can give the employee a cash bonus equal to the cost of the excess coverage, which the employee can use to pay the premiums on an individual policy.

It is important to note that the tax implications of group term life insurance can vary depending on factors such as the specific Internal Revenue Code (Code) exclusions, how the premiums are paid, and whether the plan is considered "carried" by the employer. Therefore, employees and employers should refer to the relevant tax laws and seek professional advice to understand the specific tax consequences of their group term life insurance plans.

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