Where Should Group Term Life Insurance Be Reported?

Q: Where Should Group Term Life Insurance Be Reported?

Group term life insurance may need to be reported in different places depending on the situation. If an employer provides group term life insurance coverage to their employees, the cost of that coverage must be reported on the employee's W-2 form as taxable income. If a company pays for group term life insurance coverage for their employees, the cost of that coverage may need to be reported on the company's financial statements as an expense. If an organization provides group term life insurance coverage to its members, the cost of that coverage may need to be reported on the organization's tax return as an expense. If an individual pays for group term life insurance coverage outside of their employment or membership in an organization, they may be able to deduct the cost of that coverage on their tax return as a medical expense.

Group-term life insurance coverage provided under a policy carried directly or indirectly by an employer is excluded from taxes if the total amount does not exceed $50,000, as per IRC section 79. However, if the coverage exceeds $50,000, the imputed cost of coverage must be included in income and is subject to social security and Medicare taxes.

Policy carried directly or indirectly by the employer	Policy not carried directly or indirectly by the employer
Subject to social security and Medicare taxes if coverage exceeds $50,000	No tax consequences to the employee
Employees are taxed on the cost of coverage over $50,000	Employer has no reporting requirements

A policy is considered carried directly or indirectly by the employer if:

The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.
The employer subsidizes and/or redistributes the premium cost through its role.

A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. If there is more than one policy from the same insurer, a combined test is used to determine whether it is carried directly or indirectly by the employer. However, policies can be tested separately if the costs and coverage can be clearly allocated between the two policies.

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. The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, 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.

Example 1: All employees for Employer X are in the 40 to 44 year age group. The employer pays the full cost of the insurance. If at least one employee is charged more than the IRS Premium Table rate, and at least one is charged less, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000.

Example 2: All employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. It does not matter what the rate is if the employer does not subsidize the cost or redistribute it between employees.

Example 3: A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly by her employer. She is also entitled to $100,000 of optional insurance at her own expense. This amount is also considered carried by the employer. The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income.

It is important to understand the tax consequences of group term life insurance coverage provided by an employer to avoid any issues with reporting and taxes.