Fifty-five percent of private industry employees have access to employer-sponsored life insurance, and 98% of those employees enroll in the benefit. As a popular benefit, you might offer group-term life insurance. If you decide to offer it, you need to be familiar with group-term life insurance tax.
What is group-term life insurance?
Group-term life insurance is exactly as it sounds: A type of life insurance offered to a group. Group-term life insurance is a fringe benefit, which is a benefit offered in addition to an employee’s regular wages.
You can offer group-term life insurance to your employees if you meet four requirements:
- The coverage provides a general death benefit that isn’t included in income
- You meet the 10-employee rule (must provide the insurance to at least 10 full-time employees at some time during the year; some exceptions apply)
- The coverage isn’t biased towards certain employees
- You directly or indirectly carry the group-term life insurance policy
An employee who has group-term life insurance coverage chooses beneficiaries. Their beneficiaries receive the benefits of the life insurance plan if the employee dies.
You can also extend group-term life insurance coverage to an employee’s dependents (e.g., spouse and/or children).
Is group-term life insurance taxable?
There are both taxable and nontaxable fringe benefits. Group-term life insurance is a nontaxable fringe benefit, but only up to a certain amount.
The first $50,000 of group-term life insurance coverage you pay for is excluded from each employee’s taxable income. If you pay for more than $50,000, you must include the excess in the employee’s taxable income.
This “excess,” (aka anything over $50,000) is subject to Social Security and Medicare taxes but not federal unemployment tax. And, you can decide whether you want to withhold federal income tax on group-term life insurance coverage over $50,000.
Some employers pay for the first $50,000 of group-term life insurance coverage and offer additional coverage at the employee’s expense. If the employee pays for the additional group-term life insurance coverage after $50,000, do not count their contribution as taxable income. If you pay part of the additional coverage and the employee pays part, do not count their contributions as taxable income.
Group-term life insurance for dependents
If you pay for $2,000 of group-term life insurance coverage for an employee’s dependents, it is exempt from the employee’s taxable income. If the dependent exceeds the $2,000 mark, you must include the entire value in the employee’s taxable income.
Unlike group-term life insurance for employees, dependent group-term life insurance coverage is subject to federal income, Social Security, and Medicare taxes, but not FUTA tax. Again, do not count any amounts that employees pay for the coverage.
Reporting group-term life insurance tax
Unless you pay for group-term life insurance policies over $50,000, you don’t need to worry about reporting the amount. However, you must report your costs toward any group-term life insurance over $50,000 as taxable income (Social Security and Medicare taxes) for each employee.
Include the taxable income for the additional amount (over $50,000) on each employee’s Form W-2. Add the taxable income to their taxable income in boxes 1, 3, and 5. You also need to mark the amount in box 12 with code C.
If the employee’s dependent receives coverage over $2,000, add the amount to the employee’s Form W-2.
To figure out how to determine the taxable income from the amount of coverage, continue reading.
Taxable cost of group-term life insurance
If you want to know how much to include on your employees’ Form W-2 as taxable income, you need to know the cost of group-term life insurance. The cost depends on how much each employee receives in life insurance coverage and their age.
Regardless of your actual costs, refer to the uniform premiums in IRS’s Section 79 Table I. These costs are what you will use to determine the taxable cost for each employee.
This chart shows the cost per $1,000 of protection each month:
Your employee’s taxable income depends on the amount of group-term life insurance coverage you provide in excess of $50,000. Remember not to include the first $50,000 in the employee’s taxable income.
If your employees pay any part of the group-term life insurance premium, deduct their contribution amount.
Example of group-term life insurance tax
You provide $100,000 in group-term to your employees, William and Charlotte. To get started, you will need to answer a few questions:
- What are their monthly costs?
- How much in excess of $50,000 is the coverage?
- How much is the yearly cost of coverage per employee?
What are their monthly costs?
To determine how much each employee’s monthly costs are, you need to know their ages. William is 26 years old and Charlotte is 57.
Now, consult the chart.
Because William is 26, his group-term life insurance costs $0.06 per $1,000 each month. Charlotte’s group term life insurance costs $0.43 per $1,000 each month because she is 57 years old.
How much in excess of $50,000 is the coverage?
Because you want to provide $100,000 in coverage, the excess of $50,000 is also $50,000. Now, divide $50,000 by $1,000 because the premiums are per $1,000 of insurance. You end up with 50. You will need this number in the next step.
How much is the yearly cost of coverage per employee?
Let’s start with William. Multiply his premium by his amount of coverage divided by $1,000 (50) to get the monthly cost. Then, multiply by 12 to find out how much to report on Form W-2.
Group-term Life Insurance Monthly Taxable Income: $0.06 X 50 = $3
Group-term Life Insurance Annual Taxable Income: $3 X 12 = $36.00
Add $36 to William’s taxable income on his Form W-2. You will add this amount to his total taxable income in boxes 1, 3, and 5. And, record the $36 in Form W-2 box 12 with code C.
Now, let’s find Charlotte’s yearly cost. Multiply her premium of $0.43 by 50. Then, multiply by 12 to find the annual amount.
Group-term Life Insurance Monthly Taxable Income $0.43 X 50 = $21.50
Group-term Life Insurance Yearly Taxable Income: $21.50 X 12 = $258.00
Add $258 to Charlotte’s taxable income on her Form W-2 to boxes 1, 3, and 5. Record the $258 in box 12 with code C.
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