Tax Implications for Group Life Insurance

Group life insurance is typically offered by employers as part of a benefits package. Employers may pay all or part of the premiums, and in most cases, coverage extends to all eligible employees. The most common type is basic term life insurance, which pays a death benefit if an employee passes away while covered under the policy.

Is Group Life Insurance Taxable?

The IRS has specific rules about how group life insurance is taxed. Here’s the key takeaway:

• Coverage Up to $50,000 is Tax-Free – If an employer provides group term life insurance with a death benefit of $50,000 or less, the cost of that coverage is not considered taxable income for the employee. That means employees don’t pay taxes on the premiums their employer covers.
• Coverage Over $50,000 is Taxable – If an employer pays for life insurance coverage exceeding $50,000, the portion of premiums that covers the excess amount is considered a taxable fringe benefit. The IRS calculates the taxable portion based on a formula that considers the employee’s age and the cost of coverage.

How Are Taxes Calculated on Excess Coverage?

The IRS uses something called the “Table I” rates to determine the taxable amount of employer-provided life insurance beyond the $50,000 threshold. These rates increase with age, meaning older employees may see a higher taxable amount reported on their W-2.

For example:

• An employer provides an employee with $100,000 in group life insurance coverage.
• The first $50,000 is tax-free.
• The IRS determines the cost of the excess $50,000 using its standard rate tables.
• The imputed cost (based on the employee’s age) is added to the employee’s taxable income, even though they aren’t receiving the money directly.

Employer Tax Deductions

The good news for employers is that premiums paid for group term life insurance are generally tax-deductible as a business expense. However, this deduction only applies if the plan meets IRS requirements, such as covering at least 10 employees and not favoring key executives disproportionately.

What Employees Should Know

Employees may not see an immediate cost, but if their employer provides more than $50,000 in group life insurance, they could see a small increase in their taxable income. While the tax impact is usually minimal, it’s still worth reviewing a W-2 statement to ensure everything is correctly reported.

Final Thoughts

Group life insurance is a valuable benefit, but both employers and employees should be aware of its tax implications. Employers can take advantage of tax deductions, while employees should understand how coverage amounts impact their taxable income. If you have questions about how group life insurance fits into your overall financial plan, Cooper Norman’s expert tax advisors are here to help. Contact us today for guidance tailored to your business or personal situation!