YOU ASK:

How does taxation of life insurance fringe benefits work?

WE ANSWER:

Group life insurance provided by your employer as a fringe benefit, is exempt from tax unless it exceeds $50,000, under IRC section 79. Any coverage in excess of that amount is subject to social security and Medicare taxes. It will be included in your annual income for tax purposes, and reflected in box 12, code C of your W-2 form.

Fringe Benefit Taxation When Policy Is Carried by the Employer

The $50,000 rule applies to policies which are considered to be carried either directly or indirectly by the employer, such as if the employer pays for life insurance, or when the employer arranges for the premiums to be paid. If the policy contract has been entered into after August 17, 2006, and is owned by the employer, both parties need to go through some formalities and meet certain requirements in order for the policy face value to be received tax-free.

The employer needs to put in writing that they intend to insure the employee and that the policyholder will be the beneficiary.
The insured needs to give their consent to be insured in writing.
The insured must have been employed at any time during the year prior to the insured's death, or be a key employee upon signing the contract.

Taxation When Policy Is Not Carried by the Employer

There are no tax consequences to employees if their policies are not carried directly or indirectly by their employers. If an employer pays nothing towards the life insurance fringe benefit cost, and does not redistribute it between the employees, fringe benefits are not taxable to employees regardless of the rate.

Taxation of Family Life Insurance Fringe Benefits

When group life insurance fringe benefits on the life of an employee's spouse or children, are provided and paid by the employer, they are tax-deferred, given that their amount does not exceed $2,000. This coverage amount is not taxable as it is considered a de minimis fringe benefit. It depends on the particular situation whether group life benefits will be considered de minimis; sometimes the de minimis amount can be higher than $2,000.

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