total amount of coverage
irc section 79 provides an exclusion for the first $50,000 of group term life insurance coverage provided under a policy purchased directly or indirectly by an employer. there are no tax consequences if the total amount of such policies does not exceed $50,000. Imputed cost of coverage in excess of $50,000 must be included in income, using the IRS premium schedule, and is subject to Social Security and Medicare taxes.
performed directly or indirectly by the employer
A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered to be directly or indirectly paid by the employer. A policy is considered to be carried directly or indirectly by the employer if:
- employer pays any cost of life insurance, or
- The employer pays the premiums, and the premiums paid by at least one employee subsidize those paid by at least one other employee (the “straddle” rule).
determination of whether premium charges spread on both sides of costs is based on irs premium table rates, not actual cost. You can see the premium table in the group term life insurance discussion in publication 15-bpdf.
Because the employer is affecting the cost of the premium through its role of subsidizing and/or redistributing, there is a benefit for the employees. this benefit is taxable even if the employees pay the full cost charged to them. You must figure the taxable portion of premiums for coverage in excess of $50,000.
not carried out directly or indirectly by the employer
A policy that is not considered to be carried directly or indirectly by the employer has no tax consequences for the employee. Because employees pay the cost and the employer does not redistribute the cost of premiums through an insurance system, the employer has no reporting requirements.
example 1: All employees of employer x are in the 40-44 age group. According to the IRS premium table, the cost per thousand is .10. the employer pays the full cost of the insurance. If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered to be held by the employer. therefore, each employee is subject to social security and medicare taxes on the cost of coverage over $50,000.
example 2: The facts are the same as in example 1, except that all employees are charged the same rate, which is set by the third-party insurer. the employer pays nothing for the cost. therefore, there is no taxable income for the employees. It doesn’t matter what the rate is, since the employer does not subsidize the cost or redistribute it among the employees.
Coverage provided by more than one insurer
Generally, if more than one policy from the same insurer provides coverage to employees, a combined test is used to determine whether the employer covers it directly or indirectly. however, the regulations provide exceptions that allow policies to be tested separately if costs and coverage can be clearly allocated between the two policies. see rule 1.79 for more information.
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If coverage is provided by more than one insurer, each policy must be tested separately to determine whether the employer covers it directly or indirectly.
coverage for spouse and dependents
The cost of employer-provided group term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of coverage does not exceed $2,000. this coverage is excluded as a supplemental de minimis benefit.
Whether a provided benefit is considered de minimis depends on all the facts and circumstances. in some cases, more than $2,000 of coverage could be considered a de minimis benefit. see notice 89-110 for more information.
If part of the coverage for a spouse or dependent is taxable, the same premium table is used as for the employee. the entire amount is taxable, not just the amount over $2,000.
Example 3: A 47-year-old female employee receives $40,000 of coverage per year under a policy administered directly or indirectly by her employer. she is also entitled to $100,000 of optional insurance at her own expense. this amount is also considered to be carried by the employer. the cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income. if the optional policy was not considered covered by the employer, none of the $100,000 coverage would be included in income.