Taxation of Group Term Life Insurance

Summary

Generally, anything that an employee receives from his or her employer as compensation, including fringe benefits such as life insurance, is included in the employee’s gross income unless a specific Internal Revenue Code (Code) exclusion applies. Code Section 79 governs employer-sponsored group term life insurance plans and provides us with an income exclusion of the cost of up to $50,000 of employer-provided group term life insurance coverage.

Whether or not an employer must calculate imputed income on life insurance coverage varies based on whether the group term life insurance plan is discriminatory, how the premiums are paid (employer paid, employee paid pre-tax, or employee paid after-tax) and whether or not the plan is considered “carried” by the employer as defined in Code Section 79. 

If an employee receives more than $50,000 of employer-provided group term life insurance coverage, then the “cost” (imputed income) of the insurance in excess of $50,000—less any amount paid by the employee with after-tax contributions—is included in the employee's gross income for both federal income tax and Federal Insurance Contributions Act (FICA) purposes.

This paper gives an overview of group term life insurance, then talks about the rules surrounding the income exclusion found in Code Section 79, and how and when employers might be required to perform an imputed income calculation.

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    Code §79(a). The same amount can be excluded from the employee’s wages for purposes of FICA (Social Security and Medicare) taxes. See Code §3121(a)(2)(C).

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