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Total Cost of Coverage
 

The exclusion for the primary $50,000 of group term life insurance coverage is provided by IRC section 79 under a policy carried both directly and indirectly by an employer. If the total cost of the policy does not surpass $50,000 then there are no tax penalties. The attributed cost of coverage in surplus of $50,000 must be included in the total income (using the IRS Premium Table) and can be subject to Medicare and Social Security taxes.

Carried Directly or Indirectly by the Employer
A taxable fringe benefit will arise if the coverage surpasses $50,000 and the policy is considered to be carried by the employer. A policy is considered to be carried directly or indirectly by the employer if:
The employer is responsible for any portion of the cost of the life insurance,

OR

The employer organizes the premium payments and the premiums paid by at least one employee to finance those paid by at least one other employee (this is referred to as the “straddle” rule).



The decision of whether the premium charges straddle the cost is determined by the IRS Premium Table rates, not by the actual cost.Because the employer is influencing the premium cost by subsidizing and/or redistributing roles, there is some benefit to the employees. The benefit is taxable even if the employees are paying the full cost they are charged. Any coverage that exceeds $50,000 must be calculated as a taxable portion of the premium.

Not Carried Directly or Indirectly by the Employer

A policy that is not considered to be carried directly or indirectly by the employer will carry no tax penalties to the employee. Because the employees will be paying the cost out of pocket and the employer will not redistribute the cost of the premiums through an insurance system, the employer will not have any reporting responsibility.

Coverage Supplied by More Than One Insurer

Typically, if there are multiple policies from the same insurer providing coverage to employees, a combined test will be used to determine whether it is carried directly or indirectly by the employer. However, regulations provide exceptions that can allow the policies to be tested separately.  In order for the policies to be tested separately, the costs and coverage must be clearly allocated between the two policies. See Regulation 1.79 for more information.If coverage is provided by more than one insurer, each policy must be tested separately to determine whether it is carried directly or indirectly by the employer.

Coverage for Spouse and Dependents

The cost of employer provided group term life insurance for the life of an employee’s spouse or dependent, if paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.  A benefit is considered to be “de minimis” is completely depended on the facts and circumstances of the coverage plan—in some cases, an amount greater than $2,000 can be considered as a de minimus fringe benefit.  See Notice 89-110 for further information.If any portion of the coverage for a spouse or dependents is taxable, the same Premium Table is used as for the employee. The entire amount is taxable, not solely the amount that exceeds $2,000.

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