Most employees appreciate when group term life insurance is offered as a pre-tax, payroll-deducted benefit they don’t have to think about until they need it. But behind the scenes, employers and plan administrators need to be aware of the potential tax implications of group term life insurance plans.
Employer-sponsored group term life insurance coverage with benefit amounts over $50,000 may generate taxable income to employees. Employers are responsible for including this taxable income— known as imputed income—as wages on employee W-2 forms. In addition, the imputed income is subject to Social Security and Medicare taxes. There are no potential tax consequences if the total benefit amount of employer-sponsored group term life insurance is less than $50,000.
In addition to the amount of the benefit, the calculation and reporting of imputed income depends on whether the group term life insurance plan is considered “discriminatory,” how premium is paid—employer-paid, employee-paid pre-tax, or employee-paid on an after-tax-basis—and whether the plan is considered “carried” by the employer under Section 79 of the Internal Revenue Code (IRC) and other corresponding regulations. It is important to note that under certain circumstances, even a supplemental group term life insurance plan can be considered carried by the employer.
Read our Inside Track paper to learn more about where imputed income applies and how it is calculated.
*Note that our Inside Track paper provides only a high-level overview of the tax consequences of group term life insurance and examples where imputed income may occur. Consult your legal or tax professional for information on how your actual benefits plan may be affected.