HCW Benefits Blog

Contributor:
Jenn Hargiss, Client Coordinator and Consultant
Hill, Chesson & Woody

Did you know that if you provide more than $50,000 of employer-paid life insurance to your employees, that you must also tax the employees for the value over the $50,000?

I know, I know. They didn’t receive cash, so why should they be taxed?

IRC Code 79 provides an "exclusion for the first $50,000 of group term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amounts of such policies do not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included as taxable income, using the IRS Premium Table, and is subject to social security and Medicare taxes."

There are 4 requirements that must be met in order for a policy to be subject to imputed income:

1. It must provide a general death benefit
2. It must be provided to employees as part of compensation for services
3. The insurance must be provided under a policy carried directly or indirectly by the employer.
4. The amount of insurance for each employee must be computed under a formula that precludes individual selection.

If the requirements are met, the amount of imputed taxable income must be reported on the employee's W-2 form as taxable earnings by January 31 of the following year.

Oh, wait! You provide company paid group term life for dependents as well? And, the face amount of the coverage you provide is more than $2,000? The same premise applies.

Before you get a knock at the door from the IRS, check with your payroll vendor to make sure the excess value is being taxed appropriately. Most payroll vendors will do this for you.