Is Imputed Life Insurance Taxable Income?

Many employers offer group-term life insurance as a benefit to their employees, which can sometimes create taxable income. This taxable amount is not cash paid to the employee but is a “non-cash” benefit whose value must be calculated and reported, often referred to as imputed income. The concept of imputed income arises because the employee receives an economic benefit from the insurance coverage paid for by the employer.

Determining Coverage Subject to Tax

The basis for taxing group-term life insurance is a specific monetary threshold. Under Internal Revenue Code Section 79, the first $50,000 of group-term life insurance coverage an employer provides is excluded from an employee’s income. If your employer-provided policy has a death benefit of $50,000 or less, there are generally no tax consequences. A taxable event occurs only when the total amount of coverage exceeds this $50,000 limit.

There are specific situations where the value of coverage over $50,000 is not taxed. If an employee has become permanently disabled and has terminated employment, the cost of the continued life insurance coverage is typically not taxable. Another exception applies if the employer is the direct or indirect beneficiary of the policy for the entire year. An exception also applies if a charitable organization, under section 170, is the sole beneficiary for the whole tax year.

A separate rule applies to life insurance for an employee’s spouse or dependents. The cost of this dependent coverage is not taxable to the employee if the face value of the policy is $2,000 or less. The IRS considers this a “de minimis” fringe benefit, as its value is so small that accounting for it is impractical.

Calculating the Taxable Value

Once it is determined that an employee has coverage exceeding $50,000, the next step is to calculate the taxable value of that excess coverage. The calculation is not based on the actual premium the employer pays. Instead, the IRS requires using the “Uniform Premium Table I,” found in IRS Publication 15-B, to ensure a consistent valuation method. This table standardizes the cost based on the employee’s age.

Here is the Uniform Premium Table I, which shows the cost per $1,000 of insurance protection for one month:

| Age Bracket | Monthly Cost per $1,000 |
| — | — |
| Under 25 | $0.05 |
| 25 – 29 | $0.06 |
| 30 – 34 | $0.08 |
| 35 – 39 | $0.09 |
| 40 – 44 | $0.10 |
| 45 – 49 | $0.15 |
| 50 – 54 | $0.23 |
| 55 – 59 | $0.43 |
| 60 – 64 | $0.66 |
| 65 – 69 | $1.27 |
| 70 and over | $2.06 |

To calculate the annual taxable income, first determine the total amount of coverage that exceeds the $50,000 exclusion. For example, an employee with $125,000 in coverage has $75,000 of excess coverage. This excess amount is then divided by $1,000 to find the number of insurance units to be valued, which in this case is 75.

Next, use the employee’s age as of the last day of the tax year to find the corresponding monthly cost from the table. A 48-year-old employee’s rate is $0.15 per $1,000, which is multiplied by the 75 units of insurance for a monthly taxable value of $11.25. The total annual imputed income is this monthly value multiplied by 12, or $135. Any after-tax contributions the employee makes toward the insurance can offset this taxable amount.

Reporting on Form W-2

After the employer calculates the annual taxable value of the excess group-term life insurance, this amount must be reported on the employee’s Form W-2. The specific location for this value is Box 12, where it is identified with the code “C”. This entry shows the total taxable cost of group-term life insurance coverage over $50,000.

The amount shown in Box 12 with code “C” is informational but is also included in the employee’s taxable wages. This means the same figure is already factored into the totals reported in other boxes on the W-2. Specifically, the imputed income amount is added to the wages in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips).

This inclusion has direct tax consequences. Because the value is added to these wage boxes, it is subject to federal income tax withholding, Social Security, and Medicare taxes. The employer is responsible for withholding the employee’s share of these taxes on this non-cash benefit from their regular pay. Remember that this amount is already part of the total wages to avoid adding the Box 12 amount to Box 1 wages when preparing a tax return.