Revenue Ruling 83-63: Dependent Life Insurance Tax Rules
Learn how IRS Revenue Ruling 83-63 clarifies when employer-paid life insurance for your dependents is a tax-free benefit or adds to your taxable income.
An Internal Revenue Service (IRS) Revenue Ruling is a formal interpretation of tax law applied to a specific set of facts. Revenue Ruling 83-63 specifically addresses the income tax implications for an employee when their employer provides group-term life insurance coverage for the employee’s spouse or other dependents.
Taxability of Dependent Group-Term Life Insurance
The cost of group-term life insurance coverage provided by an employer for an employee’s spouse or dependents is included in the employee’s gross income. This means the value of the benefit is treated as a form of compensation and is subject to income tax.
An exception to this rule exists for smaller amounts of coverage. If the face amount of the insurance policy for a dependent is $2,000 or less, the value of this coverage is considered a de minimis fringe benefit. Consequently, the cost for this level of coverage is not taxable to the employee.
This $2,000 threshold is applied on a per-dependent basis. An employee could have multiple dependents, each with up to $2,000 of coverage, and the value for each would be excluded from income as a de minimis benefit. It is the face amount of the policy, not the premium paid by the employer, that determines whether this exclusion applies.
Calculating and Reporting the Taxable Amount
When dependent life insurance coverage exceeds the $2,000 de minimis threshold, the entire cost of that coverage generally becomes taxable to the employee. An exception may apply if the cost of the insurance, less any amount the employee paid for it on an after-tax basis, is so small that accounting for it is administratively impractical. If the benefit is not considered de minimis under this exception, the full cost for that dependent’s policy is included in the employee’s income, not just the cost for the amount over $2,000. This value is determined based on a specific IRS schedule, not the actual premium the employer pays.
To determine the taxable amount, the IRS provides a schedule of uniform premium rates in Publication 15-B. This schedule, officially titled “Cost Per $1,000 of Protection for 1 Month,” provides rates per $1,000 of insurance coverage, categorized by five-year age brackets. A notable aspect of this calculation is that the rate used is based on the employee’s age, not the age of the spouse or dependent being insured.
Once the taxable amount is determined, the employer is responsible for reporting it. This amount is added to the employee’s wages and is subject to Social Security and Medicare taxes. The total taxable income, including the imputed cost of the dependent life insurance, is reported in Box 1 of the employee’s Form W-2, Wage and Tax Statement.