Taxes
The Employer and Employee Tax Benefits of Group Term Life Insurance
Because employees are insured as a group, the overall cost is less expensive than it would be for individual policies.
Nov. 02, 2023
Employers are often searching for the “latest and greatest” ways to reward employees with fringe benefits, but one of the best options has been around for seemingly forever: employer-paid group-term life insurance coverage. Not only can it provide tax-favored coverage for employees across-the-board, an employer can carve out extra benefits for certain higher-ups.
As you might imagine, employer-paid group-term life insurance is a form of term life insurance protection for a group of employees. Because employees are insured as a group, the overall cost is less expensive than it would be for individual policies.
The coverage must be offered to all eligible employees (e.g., those who have worked a certain number of hours per week or been employed a specified length of time). A participating employee continues to be covered as long as they remain employed by the company.
The exact details of employer-paid group-term life insurance can vary, but typically the benefit is based on a multiple of the employee’s salary. The employer can exclude other forms of compensation, such as bonuses and commissions. For example, if an employee has a salary of $100,000 a year discounting a $5,000 year-end bonus and the applicable multiple is four, coverage is extended for a death benefit of $400,00
One important advantage is that participants generally don’t have to go through the lengthy underwriting process. This can be beneficial for those who have a history of health problems. With an employer-provided group-term plan, all eligible employees are covered, regardless of their health status. However, underwriting may be required if an employees chooses to add life insurance protection.
Key tax break: Under a long-standing tax code provision, an employer may provide an employee of up to $50,000 of group-term life insurance coverage without any federal income tax repercussions, but any excess is taxable. The taxable portion of this fringe benefit is reported as taxable compensation on Form W-2. This amount, which is subject to payroll taxes as well as income tax, is based on IRS tables reflecting the employee’s age and is generally reasonable.
Because group-term is tied to employment, coverage automatically ends if the employee quits, retires or is fired for good cause. Some policies permit a departing employee to convert to an individual permanent life insurance policy. but the cost may be higher.
Finally, if a company offers more favorable benefits to officers, highly compensated individuals (HCEs) or 5%-or-more business owners, the first $50,000 of coverage constitutes a taxable benefit to them. Better approach: You can use a “carve-out plan” where high-ranking employees can opt to acquire permanent life insurance on their own.
Be aware that carve-out plan arrangements are complex and require professional assistance, Consult with a benefits specialist for more details.