IRC Section 61 and Dependent Group Life

IRC Section 61 discusses taxation of fringe benefits. The Section 79 rules do not apply directly to dependent life insurance (insurance that is on the lives of an employee’s spouse and/or dependent children). In general, an employer can provide up to $2,000 of
dependent life insurance coverage without creating any additional federal income tax liability for the employee. This exclusion is separate and distinct from the Section 79 provisions and requirements. However, dependent life insurance may create additional federal income tax liability in certain circumstances, pursuant to Section 61.
Under Section 61, an employee must include in gross income the amount by which the fair market value of the fringe benefit exceeds the sum of (i) the amount, if any, paid for the benefit by or on behalf of the recipient, and (ii) the amount, if any, specifically excluded from gross income by some other section of the Code.

Special rules apply when the fringe benefit provided to the employee is group-term life insurance. In that case, applicable Treasury regulations state that the ‘cost’ of the insurance – determined under Table I of Section 79 – is includible in the gross income of the employee, except to the extent that such cost is paid by the employee on an after-tax basis. Thus, the amount includible in income is the cost (as determined under Table I) less the amount paid for the insurance by the employee. There is an exception for
cases in which the dependent coverage constitutes a “de minimus fringe benefit”.7 If the face amount of employer provided group-term life insurance payable on the death of a spouse or dependent of an employee does not exceed $2,000, such insurance shall be
deemed to be a de minimis fringe benefit under that Code section.8 However, dependent term life coverage amounts exceeding $2,000 may have tax consequences. Common dependent life coverage may
include $5,000 per child and either $15,000, $30,000, or $45,000 for spousal coverage, and employees all pay the same flat rate for such coverage, regardless of the number of children or age of the spouse covered. Those employees who pay more than the uniform
rates in Table I will have no income. However, for those employees who pay less than the uniform rates, imputed income may ensue.

Dependent life insurance coverage cannot be offered through a cafeteria plan. Many employers offer a dependent life insurance benefit as an after-tax benefit that employees can elect on the same form they use to elect cafeteria plan benefits. In these cases, however, the dependent life coverage should not be included in
the formal cafeteria plan document and the materials distributed to employees should make clear that the dependent life insurance coverage is not part of the cafeteria plan.

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