Tax Implications for Non-Discriminatory Employer-Paid Life Insurance Coverage that Exceeds $50,000

The Internal Revenue Service discusses circumstances under which some portion of Group Term Life Insurance premiums may be taxable.

Section 79 permits up to $50,000 of group term life insurance coverage paid for by an employer (carried directly or indirectly) to be considered tax-free if the plan is non-discriminatory (i.e. does not favor key employees). Every year, employers must calculate the tax consequences of offering employees more than $50,000 in employer-paid term life coverage. Employers must also test the plan to make sure it does not favor key employees. If it does, those key
employees have to pay additional taxes. Employers also need to review their voluntary life coverage to determine whether any income needs to be imputed on the voluntary plan because of the voluntary rate table. Finally, organizations allowing employees to pay for life insurance with pretax dollars will likely need to
impute income for that coverage as well. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be
included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.


 

Imputing Income on Group-Term Life Insurance
Coverage over $50,000

Under IRC Section 79, if a policy ‘carried directly or indirectly’ by an employer provides coverage to an employee that exceeds $50,000, the employee must pay federal income tax on the cost of coverage
amounts in excess of $50,000, to the extent that such cost exceeds the employee’s after-tax contributions. ‘Cost’ for this purpose generally is not the premium the insurer charges for the coverage, but, instead, is determined by ‘Table I’ rates set by the IRS. Most
states follow federal rules for taxing group-term life insurance coverage; however, each State’s insurance regulations should be reviewed and confirmed.


Table I Rates

The Table I rates are set out in IRS regulations, and the IRS cannot revise them without issuing new regulations. The Table I rates are not revised annually. The IRS last revised the Table I rates in 1999,
generally making the new rates lower than previous rates. The current Table I rates are set out in the following table:

Group-Term Life Insurance Table I Rates Monthly Costs/$1,000 of Coverage
Age* Rate
Under 25 $0.05
25-29 .06
30-34 .08
35-39 .09
40-44 .10
45-49 .15
50-54 .23
55-59 .43
60-64 .66
65-69 1.27
70 and over 2.06
*Employee’s age on the last day of the calendar year.

Imputing Income on Group-Term Life Insurance
Coverage over $50,000

Under IRC Section 79, if a policy ‘carried directly or indirectly’ by an employer provides coverage to an employee that exceeds $50,000, the employee must pay federal income tax on the cost of coverage
amounts in excess of $50,000, to the extent that such cost exceeds the employee’s after-tax contributions. ‘Cost’ for this purpose generally is not the premium the insurer charges for the coverage, but, instead, is determined by ‘Table I’ rates set by the IRS. Most
states follow federal rules for taxing group-term life insurance coverage; however, each State’s insurance regulations should be reviewed and confirmed.

 

 

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