246 / Is the cost of group term life insurance coverage provided by an employer taxable income to an insured employee?

The cost of up to $50,000 of group term life insurance coverage generally is tax-exempt. The cost of coverage in excess of $50,000 is taxable to employees. An employee who is working for more than one employer must combine all group term coverage and is entitled to exclude the cost for no more than $50,000. If an employee contributes toward the cost of the insurance, all of the employee’s contribution for coverage up to $50,000 and for excess coverage is allocable to coverage in excess of $50,000. In other words, the employee may subtract his or her full contribution from the amount that would otherwise be taxable to the employee.¹ The employee cannot carry over from year to year any unused portion of his or her contributions.

The cost of coverage in excess of $50,000, which is the amount that is taxable to an employee, is to be calculated on a monthly basis. The steps are as follows:

(1)     Find the total amount of group term life insurance coverage for the employee in each calendar month of the employee’s taxable year, and if a change occurs during any month, take the average at the beginning and end of the month;

(2)     subtract $50,000 from each month’s coverage;

(3)     to the balance, if any, for each month, apply the appropriate rate from the tables of monthly premium rates (below);

(4)     from the sum of the monthly costs, subtract total employee contributions for the year, if any.²

The cost is determined on the basis of the life insurance protection provided to an employee during the employee’s tax year, without regard to when the premiums are paid by an employer.