As year-end approaches, employers and payroll teams should review employer-provided group-term life insurance before finalizing payroll and Forms W-2. Under Internal Revenue Code Section 79, the first $50,000 of qualifying employer-provided group-term life insurance coverage generally is excluded from an employee’s taxable income. When coverage exceeds $50,000, however, the taxable value of the excess coverage generally must be included in the employee’s income. For additional details, review the IRS guidance on group-term life insurance.

Is Group-Term Life Insurance Over $50,000 Taxable?

Generally, yes. When employer-carried group-term life insurance coverage exceeds $50,000, employers must calculate the taxable value of coverage above that threshold. Importantly, the taxable amount is not simply the premium the employer pays. Instead, the cost is calculated using the employee’s age and the IRS Uniform Premium Table, less applicable employee contributions. The applicable rates and calculation guidance are available in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

What Employers and Payroll Teams Should Know

For employees with applicable group-term life insurance coverage exceeding $50,000:

• The $50,000 threshold matters. There generally are no tax consequences when employer-carried group-term life insurance does not exceed $50,000.
• The taxable benefit must be calculated. Employers use the IRS Premium Table and the employee’s age to determine the imputed cost of coverage above $50,000.
• Payroll taxes apply. The taxable cost of coverage over $50,000 is generally subject to Social Security and Medicare taxes.
• W-2 reporting is required. The taxable benefit is reported as wages on Form W-2 and is separately identified in Box 12 using Code C.

What Should Employers Do Before Year-End?

Now is a good time for business owners, HR leaders, and payroll teams to review their records and:

• Identify employees with employer-carried group-term life insurance exceeding $50,000.
• Confirm each employee’s coverage amount and applicable employee contributions.
• Calculate the taxable benefit using the appropriate IRS rates.
• Record the resulting taxable amount through payroll before year-end reporting is complete.
• Confirm the benefit is appropriately reflected on each affected employee’s Form W-2.

 
Year-end payroll involves a lot of moving pieces, and group-term life insurance can be easy to overlook. KPM’s payroll team can help you calculate and record the applicable taxable amount, review year-end payroll information, and prepare for accurate W-2 reporting. Contact our team for assistance.