Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Group-Term Life Policy Tax Consequences

Posted by William Byrnes on February 25, 2011


The Internal Revenue Code provides an exclusion from income for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. [1] Thus, there are no tax consequences to the individual if the total amount of such policies does not exceed $50,000.  However, the imputed cost of coverage in excess of $50,000 must be included in income to the individual, using the IRS Premium Table[2] and are subject to social security and Medicare taxes.

A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if:

  1. The employer pays any cost of the life insurance, or
  2. The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (known as the “straddle” rule).

A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee.  Also, because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements.

Read the analysis at AdvisorFYI

 

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