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Taxation of Group Term
Life Insurance
Learn the IRS rules so you can answer your prospects’ questions.
Kirk Okumura
Prospects and clients want to work
with advisors who demonstrate they
are knowledgeable not only about the
products they sell, but also about the alternate and supplementary products
available. Thus, in discussing life insurance needs, it is helpful to understand the
various aspects of group term life insurance. One important aspect is taxation.
This article will provide an overview
of the federal income-tax treatment of
group term life insurance for both the
employee and the employer, clarifying
the confusion that often arises between
their respective limits. In addition, it will
touch upon the income-tax treatment of
the death benefits.
The tax treatment of group term life
insurance is stipulated in Section 79 of
the Internal Revenue Code, which provides favorable tax treatment to life insurance plans that qualify as group term
insurance. Most employer plans are established to meet these requirements.
Under Section 79, the cost of the first
$50,000 of employer-provided coverage is
not taxable income to the employee. The
cost of coverage in excess of $50,000 represents taxable income. For purposes of
Section 79, the cost of the excess coverage is determined by a government table
called the Uniform Premium Table I on
Page 24. However, the income-taxable
amount is reduced by any employee contributions toward the premium.
ployee’s attained age at the end
of the tax year) is multiplied
by the number of thousands in
excess of 50 of group term insurance on the employee. For
example, the famous law firm
of Dewey, Cheetham and Howe
sponsors a group term life insurance plan in which each employee is provided $150,000 in
coverage courtesy of the firm. The benefit for Tina, a 40-year-old paralegal, is a
$150 expense to the firm. However, the
cost for Tina for federal income-tax purposes would be calculated as follows:
THE TAX TREATMENT
OF GROUP TERM LIFE
INSURANCE IS STIPULATED
IN SECTION 79 OF THE
INTERNAL REVENUE CODE.
Calculating costs
To calculate the cost of an employee’s
coverage for one month of protection under a group term insurance plan, the Uniform Premium Table I cost shown for the
employee’s age bracket (based on the em-
The monthly costs are then totaled
to obtain an annual cost. Assuming no
change in the amount of coverage during the year, the annual cost is $10 x 12,
or $120. Any employee contributions for
the entire amount of coverage are deducted from the annual cost to determine the
taxable income that an employee must report. Had Tina contributed $50 this year
toward the coverage, she would have to
include only $70 ($120 - $50)
as income for federal income-tax purposes.
Any plan that qualifies as
group term insurance under
Section 79 is subject to nondiscrimination rules, and the $50,000 exclusion is not available to key employees
if a plan is discriminatory. Such a plan fa-
Minus Sec. 79 exclusion − 50,000
Amount subject to taxation =$100,000
