247 / Is group term life insurance coverage on the lives of an employee’s spouse and dependents taxable income to the employee?

Group term coverage on the lives of an employee’s spouse and dependents is not included in the otherwise applicable $50,000 exemption (see Q 246). The cost of this coverage will be income-tax free, however, if the face amount does not exceed $2,000.¹ In determining whether coverage in excess of $2,000 is excludable from income as a de minimis fringe benefit, only the excess of the cost over the amount paid by the employee on an after tax basis for the coverage is taken into consideration.

In one case where dependent group term life insurance was available to employees through a voluntary employees’ beneficiary association (“VEBA”) and the employer’s only role in the arrangement was to provide administrative services as an independent contractor, the life insurance coverage was not a fringe benefit subject to taxation under Treasury Regulation Sections 1.61-21 or 1.61-2(d)(2)(ii)(b). No amount was therefore includable in employees’ income.²

Where an employer’s group term life insurance plan permits employees to extend group life benefits to domestic partners and their dependents, the cost of this group term coverage is not excludable from income under either IRC Section 79 or IRC Section 132(a)(4). Rather, the Table I cost of the coverage is includable in an employee’s gross income under IRC Section 61.³

1.     Notice 89-110, 1989-2 CB 447.