255 / What are the tax consequences of dividends paid to an employee under a policy that provides both permanent benefits and group term life insurance?

If an employee pays nothing toward the cost of permanent benefits, all dividends under a policy that actually are received or that are constructively received by an employee are includable in the employee’s income.¹

If an employee pays a part or all of the cost of the permanent benefits, the amount of dividends includable by the employee is determined under this formula: (D + C) – (PI + DI + AP), where D equals the total dividends received by the employee in the employee’s current and all preceding taxable years; C equals the total cost of permanent benefits for the employee’s current and all preceding tax years, using the formula in Q 254; PI equals the total premium included in the employee’s income under the formula in Q 189 for the employee’s current and all preceding tax years; DI equals the total amount of dividends included in the employee’s income under the formula in this answer for all preceding tax years of the employee; and AP equals the total amount paid for the permanent benefits by the employee in the current and all preceding tax years of the employee.² It appears that an employee who pays no more than allocated cost will be taxed under the formula on the amount of dividends the employee receives.