Tax treatment of group term life insurance

Per Section 79 of the Internal Revenue Code, the first $50,000 of group term life insurance policy face value insuring the life of an employee carried directly or indirectly by an employer is received tax free by the employee. “Carried directly” means that the employer pays any cost of the life insurance. “Carried indirectly” means that the employer affects the premium cost to the employee through a subsidizing or redistributing role (the “straddle” rule), whereby the premiums paid by at least one employee subsidize premiums paid by one or more other employees, with employee premium rates examined in relation to imputed policy costs (premiums “straddling” the costs) as defined by the IRS Premium Table published in IRS Publication 15-B (see Figure 1 below). If a group term life insurance policy is not carried directly or indirectly by the employer (policy costs thus being borne fully by the employee), there are no tax consequences to the employee nor reporting requirements for the employer.

Group term life insurance face values in excess of $50,000 are deemed a fringe economic benefit to the employee and do not receive this favorable tax free treatment. The taxable amount for the employee is not the actual cost incurred to purchase the policy; rather, it is the imputed monthly cost of insurance coverage as delineated in the IRS Premium Table published in IRS Publication 15-B (see Figure 1 below), which stratifies monthly premiums per $1,000 of policy face value based on age interval buckets without consideration of the employee’s sex. This imputed monthly cost of insurance is deemed imputed income to the employee and must be included in the employee’s gross income and subject to ordinary income tax rates; furthermore, this imputed income is subject to social security and medicare taxes. Regardless of the face value of the policy, the first $50,000 of the policy face value always remains exempt from tax as noted above.

In the scenario of multiple term life insurance policies benefiting the same employee under the same insurer, generally a combined test is applied in order to determine whether the the employer carried directly or indirectly the costs of the policies; however, Regulation 1.79 allows for policies to be tested separately in this scenario if costs and coverages can be distinctly separated between the different policies. In the scenario of multiple term life insurance policies benefiting the same employee under different insurers, a separate test is applied to each policy in order to determine whether the employer carried directly or indirectly the costs of each policy.

In the scenario of group term life insurance policies insuring the life of an employee’s spouse or dependents, the same rules apply as detailed above for group term life insurance policies insuring the life of the employee. However, for policies insuring the employee’s spouse or dependents, the policy face value exclusion limit for tax free treatment is $2,000. Note that this employee benefit is a de minimis fringe benefit and, in certain circumstances, policy face values greater than $2,000 may be received tax free by the employee if deemed to be de minimis fringe benefits.

Figure 1. 2024 IRS Group Term Life Insurance Premium Table. Cost is per $1,000 of policy face value in excess of $50,000 for 1 month. Multiply by 12 for annual cost.