Group Term Life Insurance

<p>The cost of excess group term life insurance is not subject to withholding, but an employer that provides excess coverage must file an information return for each calendar year and must provide statements to employees receiving the excess coverage. Each employer reports as if it were the only employer carrying group term insurance on an employee.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> An employer that maintains a group term life insurance plan is required to file an information return with the IRS indicating the number of its employees, the number of employees eligible to participate in the plan, the number of employees participating in the plan, the cost of the plan, the taxpayer identification number of the employer and the type of business in which it is engaged. The employer also must report on the return the number of its highly compensated employees, the number of highly compensated employees eligible to participate in the plan, and the number of highly compensated employees actually participating in the plan.<a href="#_ftn2" name="_ftnref2">²</a> For plan years beginning prior to the issuance of further guidance from the IRS, group term life insurance plans are not required to meet the reporting requirements of IRC Section 6039D.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 6052(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 6039D.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. Notice 904 1990-1 CB 335, as modified by Notice 20024, 2002-1 CB 785.</p></p><br />

<p>Yes, if each employee&rsquo;s right to the insurance on his or her life is non-forfeitable when the premiums are paid.<br /> <br /> If an employee has only a forfeitable right to the insurance, an employer cannot deduct premium payments.<br /> <br /> If an employee&rsquo;s rights change from forfeitable to non-forfeitable, an employer may deduct the fair market value of the policy in the employer&rsquo;s taxable year in which or with which ends the employee&rsquo;s tax year in which the employee&rsquo;s rights become non-forfeitable, and the fair market value ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="144">144</a>) of the policy is includable in the employee&rsquo;s gross income.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> An employee generally will be deemed to have properly included the amount as compensation in gross income if the employer satisfies the reporting requirements of IRC Section 6041 or IRC Section 6041A.<a href="#_ftn2" name="_ftnref2">²</a> Premiums paid after the employee&rsquo;s rights become non-forfeitable are deductible when paid.<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 83(h); <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.83-6(a)(1)&amp;type=C">Treas. Reg. &sect; 1.83-6(a)(1)</a>.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.83-6(a)(2)&amp;type=C">Treas. Reg. &sect; 1.83-6(a)(2)</a>.</p></p><br />

<p>GROUP TERM LIFE INSURANCE Editor&rsquo;s Note: The applicability date of the fiduciary rule was repeatedly delayed, finally being vacated entirely by the Fifth Circuit. As of the date of this publication, the DOL&rsquo;s new prohibited transaction exemption (PTE) 2020-02 replaces the 2016 rule. The exemption closely follows the basic concepts of the original rule. It remains uncertain how this new standard will impact advisors who sell life and disability insurance. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3982">3982</a> for details.<br /> <br /> While advisors who provide advice relating to health savings accounts were to be covered by the Department of Labor&rsquo;s heightened fiduciary standard, certain related products, such as disability and term life insurance policies, were expressly excluded from the definition of investment property and were thus not subject to the fiduciary standard. This would have been the case to the extent that these products do not contain an investment component. As a result, presumably, permanent life insurance policies that did contain an investment component would have been subject to the DOL fiduciary rule.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. 29 CFR &sect; 2 2510.31(g)(4).</p></p><br />

<p>Yes.<br /> <br /> Premiums paid by an employer for group term insurance on the lives of employees are deductible.<a href="#_ftn1" name="_ftnref1">¹</a> This is so even if a plan discriminates in favor of key employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="249">249</a>).<br /> <br /> A corporation may deduct premiums it pays for coverage on the lives of commission salespersons irrespective of whether an employer-employee relationship exists between the salesperson and the corporation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> No deduction will be allowed for the cost of coverage on the life of an employee if an employer is directly or indirectly a beneficiary under a policy.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If group term proceeds are to be used to fund a buy-sell agreement between stockholders of a corporation, the IRS may deny the corporation a business expense deduction for its premium payments ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="299">299</a>).<br /> <br /> Contributions will not be deductible unless, when considered with all an employee&rsquo;s other compensation, they are reasonable (Q Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3519">3519</a>).<br /> <br /> Current deduction of contributions to a welfare benefit fund ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4090">4090</a>) to provide group life insurance to employees is strictly limited. Contributions to a welfare benefit fund to provide life insurance benefits to employees are subject to certain requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4092">4092</a>).<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 162(a); <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Rev.%20Rul.%2056-400&amp;type=C">Rev. Rul. 56-400</a>, 1956 CB 116.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Rev.%20Rul.%2056-400&amp;type=C">Rev. Rul. 56-400</a>, <em>supra.</em><br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC &sect; 264(a).</p></p><br />

<p>Yes. The cost of group term life insurance that is includable in the gross income of the employee is considered wages subject to Social Security tax.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The general rule is that an employee may exclude the cost of the first $50,000 of employer-provided group term life insurance from income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="246">246</a>). Therefore, only the cost of coverage in excess of $50,000 generally will be subject to the Social Security tax.<br /> <br /> An employer is required to report amounts includable in the wages of current employees for purposes of the Social Security tax on employees&rsquo; W forms. An employer generally may treat wages as though paid on any basis so long as they are treated as paid at least once each year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Social Security tax must be paid by an employee if a payment for group term life insurance is considered wages and is for periods during which there is no longer an employment relationship between the employer and the employee. An employer is required to separately state the portion of an employee&rsquo;s wages that consist of payments for group term life insurance and the amount of Social Security tax.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 3121(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Notice 88-82, 1988 CB 398.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC &sect; 3102(d).</p></p><br />

<p>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&rsquo;s income.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> 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) &ndash; (PI + DI + AP), where D equals the total dividends received by the employee in the employee&rsquo;s current and all preceding taxable years; C equals the total cost of permanent benefits for the employee&rsquo;s current and all preceding tax years, using the formula in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="254">254</a>; PI equals the total premium included in the employee&rsquo;s income under the formula in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="189">189</a> for the employee&rsquo;s current and all preceding tax years; DI equals the total amount of dividends included in the employee&rsquo;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.<a href="#_ftn2" name="_ftnref2">²</a> 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.<br /> <br /> <hr align="left" size="1" width="33%"><p><a href="#_ftnref1" name="_ftn1">1</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.79-1(d)(5)&amp;type=C">Treas. Reg. &sect; 1.79-1(d)(5)</a>.</p><p><a href="#_ftnref2" name="_ftn2">2</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.79-1(d)(5)&amp;type=C">Treas. Reg. &sect; 1.79-1(d)(5)</a>.</p></p><br />

<p>Yes.<br /> <br /> Death proceeds received by individuals are wholly tax-exempt whether received from group permanent or group term insurance.<a href="#_ftn1" name="_ftnref1">¹</a> Where group term life insurance coverage is provided to domestic partners of employees by an employer, death proceeds paid on the death of a domestic partner are excluded from income under IRC Section 101.<a href="#_ftn2" name="_ftnref2">²</a> The same rules as are applicable to proceeds under individual policies generally apply ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="63">63</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="71">71</a>). Special rules apply if insurance is payable under a qualified pension or profit sharing plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3969">3969</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3970">3970</a>).<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 101(a); <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.101-1&amp;type=C">Treas. Reg. &sect; 1.101-1</a>.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Let. Rul. 9717018.</p></p><br />

<p>Yes. Where a group life insurance policy provides permanent benefits but does not meet the requirements necessary for any part of the benefit to be treated as group term life insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="254">254</a>), an insured employee will be taxed as follows: premiums paid by an employer for insurance on the life of an employee generally will be includable in the insured employee&rsquo;s gross income if the proceeds of the insurance are payable to the beneficiary of the employee.<a href="#_ftn1" name="_ftnref1">¹</a> For the tax treatment of the cost of group permanent insurance under a qualified plan, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3943">3943</a>.<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>.<a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.61(d)(2)(ii)&amp;type=C">Treas. Reg. &sect; 1.61(d)(2)(ii)</a>.</p></p><br />

<p>An employer may provide employees with up to $50,000 of group term life insurance protection each year without cost to employees. The taxable value of group term insurance in excess of the exclusion amount generally is determined under a table (Table I) provided by the IRS ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="246">246</a>). The exclusion generally is not available unless the insurance provided under the plan satisfies the definition of group term life insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="241">241</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="244">244</a>). If insurance provided does not meet the definition of group term life insurance, an employer&rsquo;s premium cost is includable in employee income.<br /> <br /> If a plan provides group term life insurance that is discriminatory, the exclusion is not available to key employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="249">249</a>). The taxable cost to a key employee of the entire amount of insurance under a discriminatory plan is the higher of the actual cost or the cost under Table I.<br /> <br /> A premium paid by an employer is deductible. Group term life insurance may be provided under term policies or under policies providing a permanent benefit ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="254">254</a>). An employer also may provide permanent life insurance to employees on a group basis ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="257">257</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="258">258</a>).<br /> <br /> A death benefit of group life insurance, whether term or permanent, generally is excludable from a beneficiary&rsquo;s income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="259">259</a>).</p><br />

<p>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&rsquo;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.<a href="#_ftn1" name="_ftnref1">¹</a> The employee cannot carry over from year to year any unused portion of his or her contributions.<br /> <br /> 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:<br /> <p style="padding-left: 40px">(1) Find the total amount of group term life insurance coverage for the employee in each calendar month of the employee&rsquo;s taxable year, and if a change occurs during any month, take the average at the beginning and end of the month;</p><p style="padding-left: 40px">(2) subtract $50,000 from each month&rsquo;s coverage;</p><p style="padding-left: 40px">(3) to the balance, if any, for each month, apply the appropriate rate from the tables of monthly premium rates (below);</p><p style="padding-left: 40px">(4) from the sum of the monthly costs, subtract total employee contributions for the year, if any.<a href="#_ftn2" name="_ftnref2">²</a></p><p><br /> The cost is determined on the basis of the life insurance protection provided to an employee during the employee&rsquo;s tax year, without regard to when the premiums are paid by an employer.<br /> <br /> To compute the cost of excess group term life insurance coverage, the rates in the table immediately below should be used.<a href="#_ftn3" name="_ftnref3">³</a><br /> </p><table><br /> <tbody><br /> <tr><br /> <td colspan="2" width="540"><br /> <p style="text-align: center"><em>Uniform Premiums for $1,000 of Group Term Life Insurance Protection*</em></p><br /> </td><br /> </tr><br /> <tr><br /> <td colspan="2" width="540"><br /> <p style="text-align: center"><strong>Rates Applicable to Cost of Group-Term Life Insurance</strong></p><br /> </td><br /> </tr><br /> <tr><br /> <td colspan="2" width="540"><br /> <p style="text-align: center"><strong>Provided After June30, 1999</strong></p><br /> </td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270"><strong>5-Year Age</strong><br /> <br /> <strong>Bracket</strong></td><br /> <td width="270"><br /> <p style="text-align: center"><strong>Cost per $1,000 of Protection</strong></p><br /> <p style="text-align: center"><strong>for One-Month Period</strong></p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">Under 25</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">$0.05</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">25 to 29</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">.06</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">30 to 34</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">.08</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">35 to 39</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">.09</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">40 to 44</p><br /> </td><br /> <td style="text-align: center" width="270">.10</td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">45 to 49</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">.15</p><br /> </td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270">50 to 54</td><br /> <td width="270"><br /> <p style="text-align: center">.23</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">55 to 59</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">.43</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">60 to 64</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">.66</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">65 to 69</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">1.27</p><br /> </td><br /> </tr><br /> <tr><br /> <td width="270"><br /> <p style="text-align: center">70 and above</p><br /> </td><br /> <td width="270"><br /> <p style="text-align: center">2.06</p><br /> </td><br /> </tr><br /> </tbody><br /> </table><p><br /> *In using the above table, the age of the employee is the employee&rsquo;s attained age on the last day of the employee&rsquo;s taxable year.<br /> <br /> The exemption of the cost of up to $50,000 of group term life is not available with respect to group term insurance purchased under a qualified employees&rsquo; trust or annuity plan. The provisions of IRC Section 72(m)(3) and Treasury Regulation Section 1.72-16 apply to the cost of the protection purchased under qualified plans and no part of the cost is excludable from an employee&rsquo;s gross income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3940">3940</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Premiums for supplemental insurance in excess of $50,000 provided by an employer under a group term insurance plan are not taxable to an insured employee when paid by a family member to whom the employee has assigned the insurance.<a href="#_ftn5" name="_ftnref5">⁵</a> If the cost of the coverage in excess of $50,000 is shared by an employer and assignee, the employer&rsquo;s portion of the cost is includable in the insured employee&rsquo;s gross income.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The exemption for the first $50,000 is not available to key employees if a plan discriminates in their favor ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="249">249</a>).<br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 79(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.79-3&amp;type=C">Treas. Reg. &sect; 1.79-3</a>.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.79-3(d)(2)&amp;type=C">Treas. Reg. &sect; 1.79-3(d)(2)</a>.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC &sect; 79(b)(3); <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Treas.%20Reg.%20%C2%A7%201.79(d)&amp;type=C">Treas. Reg. &sect; 1.79(d)</a>.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Rev.%20Rul.%2071-587&amp;type=C">Rev. Rul. 71-587</a>, 1971 CB 89.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. <a href="http://www.lawjournalpress.com/citationservice/CitationServices.aspx?citation=Rev.%20Rul.%2073-174&amp;type=C">Rev. Rul. 73-174</a>, 1973-1 CB 43.</p></p><br />