Revenue Ruling 63-43: Group Life Insurance Tax Rules

The tax treatment of employer-provided group-term life insurance is a core component of many benefits packages. Early administrative guidance established that premiums paid by an employer for this insurance are generally not considered taxable income to the employee, a departure from the rule that most fringe benefits count as compensation. This approach created a clear distinction between group-term life insurance and other forms that build cash value.

The core principles are now codified in Internal Revenue Code Section 79, which provides the definitive rules employers and employees must follow. It preserves the tax exclusion for employer-paid premiums while introducing specific limitations and requirements. The regulations under this section provide a roadmap for navigating the tax implications, defining qualifying insurance, and establishing rules to prevent discrimination.

Defining Qualifying Group-Term Life Insurance

For a life insurance plan to receive favorable tax treatment, it must meet a specific set of criteria. The first requirement is that the policy must provide a general death benefit. This means the benefit is payable upon the death of the employee and is not a component of a policy that builds a cash value or provides a permanent benefit, an economic value extending beyond one policy year.

A second condition is that the insurance must be provided to a group of employees. Tax regulations define a “group” as consisting of at least 10 full-time employees at some point during the calendar year. Plans covering fewer than 10 employees may still qualify, but they are subject to more stringent requirements to prevent them from being tailored to favor owner-employees.

The policy must also be carried directly or indirectly by the employer. A policy is considered carried by the employer if the employer pays any portion of the cost or if the company arranges for premium payments where the rate structure results in one employee subsidizing another.

Finally, the amount of insurance provided to each employee must be determined by a formula that prevents individual selection. The coverage amount cannot be a choice made by the employee or employer on a case-by-case basis. Instead, the formula should be based on objective factors such as a multiple of salary, years of service, or job position.

Tax Treatment for Employees

The primary tax advantage for an employee in a qualifying plan is a specific income exclusion. Under these rules, the cost of the first $50,000 of coverage provided by an employer is not included in the employee’s gross income. This exclusion applies only to insurance on the employee’s life; coverage for a spouse or dependent is treated separately and is generally excludable as a de minimis fringe benefit if the face amount is $2,000 or less.

When an employer provides coverage exceeding the $50,000 threshold, the economic value of the excess coverage must be included in the employee’s taxable income. This taxable amount is not based on the actual premium the employer pays but is determined using a specific table provided by the IRS, known as the Uniform Premium Table, or Table I. This table sets a standard monthly cost per $1,000 of insurance, with the cost increasing based on the employee’s age, determined as of the last day of the tax year.

To calculate the taxable income, one must first determine the amount of coverage in excess of $50,000. For example, an employee with $150,000 in coverage has $100,000 of excess coverage. This excess amount is then divided by $1,000 to find the number of insurance units, which would be 100 units.

The next step involves using the Uniform Premium Table. If this 46-year-old employee has a Table I rate of $0.15 per $1,000 per month, the monthly taxable cost is calculated by multiplying the number of excess units (100) by the table rate ($0.15), resulting in $15 per month. To find the annual taxable amount, this monthly figure is multiplied by 12, yielding $180. This $180 is considered “imputed income” and must be added to the employee’s wages for tax purposes, though any after-tax contributions can reduce the taxable amount.

There are specific exceptions to these rules. The cost of group-term life insurance is fully excludable from income for an employee who has separated from service and is permanently and totally disabled. A full exclusion is also available if the beneficiary of the policy is the employer or a charitable organization.

Tax Treatment for Employers

From the employer’s perspective, the premiums paid for a qualifying group-term life insurance plan are considered an ordinary and necessary business expense. As a result, the employer can typically deduct the full amount of the premiums paid during the tax year.

The employer’s tax deduction is not limited by the $50,000 coverage threshold that applies to employees. For instance, if an employer pays the premium for a $200,000 policy on an employee, the full cost of that premium is deductible as a business expense, even though the employee will have imputed income related to $150,000 of that coverage.

This tax treatment provides a direct financial incentive for employers to offer life insurance as part of their benefits package, as the ability to deduct the premiums lowers the net cost of providing the benefit. The only major exception to this rule on deductibility occurs if the employer is directly or indirectly the beneficiary of the policy, in which case the premiums are not deductible.

Nondiscrimination Rules and Key Employees

To ensure that group-term life insurance plans do not unfairly benefit a company’s highest-paid individuals, the tax code includes specific nondiscrimination rules. These rules are designed to prevent plans from being structured to favor “key employees.” If a plan is found to be discriminatory, these key employees lose their ability to exclude the cost of the first $50,000 of coverage from their income, though benefits for non-key employees remain unaffected.

A “key employee” is defined by specific criteria related to ownership or compensation. This includes an officer of the company with annual compensation greater than $230,000 (as of 2025), an individual who owns more than 5% of the business, or a 1% owner whose annual compensation exceeds $150,000. Former employees who were key employees at the time of retirement or separation also fall into this category.

The nondiscrimination requirements consist of two primary tests: an eligibility test and a benefits test. The eligibility test examines who is allowed to participate in the plan. A plan passes this test if it meets one of several conditions, such as benefiting at least 70% of all employees, having at least 85% of its participants be non-key employees, or covering a classification of employees that the IRS does not find to be discriminatory.

The benefits test focuses on the type and amount of benefits provided. It requires that all benefits available to key employees are also available to non-key employees. A plan will generally satisfy this test if the amount of insurance provided bears a uniform relationship to employee compensation, such as if all employees receive coverage equal to two times their annual salary.

If a plan fails the nondiscrimination tests, the consequences are targeted directly at the key employees. For them, the tax-free $50,000 exclusion is eliminated. They must include the full cost of their coverage in their gross income, which is the greater of the actual cost of the insurance or the cost calculated using the IRS Uniform Premium Table.

Reporting and Compliance Requirements

Employers have specific reporting obligations for the taxable portion of group-term life insurance. When an employee receives coverage exceeding $50,000, the calculated imputed income must be reported on their annual Form W-2, Wage and Tax Statement. This ensures that the value of this fringe benefit is properly included as part of the employee’s overall compensation for tax purposes.

The imputed income amount is included in several boxes on the Form W-2. It must be added to the totals reported in Box 1 (Wages, tips, other compensation), Box 3 (Social security wages), and Box 5 (Medicare wages and tips). In addition to being part of these totals, the amount is also reported separately in Box 12, where it is identified with the code “C”.

A critical aspect of compliance relates to payroll taxes. The imputed income from excess group-term life insurance is subject to Social Security and Medicare taxes, collectively known as FICA taxes. The employer is responsible for withholding the employee’s share of these taxes and paying the employer’s share.

However, this imputed income is not subject to federal income tax withholding. While the amount is included in Box 1 as taxable wages, the employer is not required to withhold income tax from the employee’s paychecks for this specific benefit. The employee is responsible for paying the associated income tax, either through other withholdings or estimated tax payments.