Group Life
Group Term Life Insurance: Administrative Procedures
Tax reporting and contractual provisions.
Many employers provide employees with employer-paid group term life insurance coverage and/or allow employees to purchase voluntary group term life insurance coverage.
Employers need to know what tax law requires them to report, and common contractual provisions as it relates to life insurance.
Imputed Income
Employee
Pursuant to Internal Revenue Code Section 79, premiums paid by an employer for group term life insurance coverage up to $50,000 are excludable from income. The “cost” of the coverage in excess of $50,000 must be included in the employee’s gross income and is subject to federal income and FICA (Social Security and Medicare) taxes. By cost, we do not refer to the premium paid by the employer but to the cost determined under the Uniform Premium Table contained in the IRS regulations.
The cost of the coverage added to an employee’s gross income is commonly referred to as “imputed income.”
Dependent
The cost of employer-paid group term life insurance on an employee’s spouse and/or dependents is not taxable to the employee if the face amount of the coverage does not exceed $2,000. If the $2,000 limit is exceeded, all dependent life insurance, including the first $2,000, is taxable. The Uniform Premium Table rates—using the dependents’ ages to select the applicable rate—must be used in calculating the amount to impute to the employee’s gross income.
W-2 Reporting
The employer providing the coverage must report the cost of coverage on the employee’s W2 and withhold the employee’s portion of FICA taxes. It is important to note that the employer must also pay its portion of FICA taxes.
Age
Cost of $1,000 of GTL for one month
Cost of $1,000 of GTL for one year
Under 25
$0.05
$0.60
25-29
$0.06
$0.72
30-34
$0.08
$0.96
35-39
$0.09
$1.08
40-44
$0.10
$1.20
45-49
$0.15
$1.80
50-54
$0.23
$2.76
55-59
$0.43
$5.16
60-64
$0.66
$7.92
65-69
$1.27
$15.24
70+
$2.06
$24.72
| Benefit | Annual Cost per $1,000 |
| $1-50,000 | 0 |
| $50,001-60,000* | $0.96 |
*If the total amount of coverage changed throughout the calendar year, employers will need to identify the periods of coverage and impute the coverage for each period.
Example
A 32-year-old employee receives $60,000 of employer-paid group-term life insurance. Using the tables, we’ll calculate the cost to be added to the employee’s annual gross income.
Because the employee has 10 units of $1,000, we multiply $0.96 times 10. This equals $9.60, which should then be added to the employee’s annual gross income.
Waiver of Premium
The waiver of premium is a provision under most group policies that waives the individual’s premium payments if an employee’s active service ends due to total disability. The employee must submit a claim for a waiver of his/her life insurance premium and the employer must continue to pay the premium until the waiver of premium is approved by the insurance carrier. Most policies have a waiting or elimination period before a disabled individual is eligible to make application for waiver of premium and a deadline for filing for the waiver once eligible. Employers should review their contracts and consult with a RJF representative if any employee is eligible to take advantage of this provision. To be eligible, they must have ended active service for reason of prolonged disability.
Guaranteed Issue Amount
The guaranteed issue amount is the amount of life insurance an individual may receive without providing Evidence of Insurability. Any amount for which Evidence of Insurability is required will not be effective until the individual is eligible for coverage and Evidence of Insurability has been approved. Life insurance benefits in excess of the guarantee issue amount will only be paid if the insurance carrier has approved and accepted the risk. Employers should deduct, from the employees paycheck, the premium cost of the life insurance up to the guaranteed issue amount until the insurance carriers has approved any amounts over the guaranteed issue.
Disclaimer
This document is provided for informational and educational purposes only. It is not intended to, nor does it, provide any form of legal advice regarding the subject matter of the documents. You should not take any actions on the basis of this document, but instead should seek legal advice regarding your issues.