Taxation of Group Life Insurance

Question 1

List 4 characteristics of Group Life Insurance Plan Ownership (who owns what?)

Answer 1

1. Under an employer-sponsored group insurance plan, the employer owns the policy and holds the master policy.
2. The employees are the individual insureds whose coverage is evidenced by a certificate of coverage.
3. The amount of insurance coverage provided for each employee is typically a percentage of his or her salary, such as 100 percent, 150 percent, 200 percent, etc.
4. The employer often pays the entire premium. However, some plans may call for contributions by the employee.

Question 2

IRS Section 79 covers what type of insurance?

Up to what maximum amount is tax-free?

What does the IRS Table 1 define?

Answer 2

The taxation of group term life insurance is covered by Section 79 of the Internal Revenue Code.

Under this section, the value of employer-paid group term life insurance up to $50,000 is a tax-free benefit to the employee.

The coverage in excess of the first $50,000 is treated as a taxable benefit and must include the amount in his or her income for tax purposes.

The value of the employer-paid group term life insurance in excess of $50,000 is determined under IRS Table I.

IRS Table I defines the monthly “cost-per-$1,000” of group life coverage (see table below).

These figures—not the actual premium costs the employer pays—are used to determine the value of the group life coverage for tax purposes.

Consider the 46-year-old employee who has $120,000 in employer-funded group life coverage. The value of coverage for this employee is $.15 per month per $1,000 of coverage in excess of $50,000 (i.e., $70,000). Assuming the employee was covered a full year, the taxable value of coverage for this employee (called “imputed income”) is $126, calculated as follows: ($.15 × 12 months) × 70.

Question 3

Who gets to deduct employer paid life insurance?

To assure non-discrimination, the plan requires how much participation?

And what % must not be considered “key” employees?

Answer 3

While employee-paid group life premiums are not deductible by employees, the employer can deduct premiums it pays on a group life insurance plan.

However, the plan cannot discriminate against rank-and-file employees. To ensure that this does not happen, the plan must meet specific requirements:

• The plan must benefit at least 70 percent of all employees or
• At least 85 percent of the employees who participate in the plan must not be key employees.