Tax Rules When a Corporation Pays for Employee Group Life
Unpack the tax considerations and compliance requirements for businesses offering employee group life insurance. Essential guidance for employers and staff.
Corporations providing group life insurance to employees involve specific financial and tax considerations. These common employee benefits offer financial protection. Understanding the tax implications, which depend on policy type and structure, ensures compliance and accurate reporting.
Distinguishing Group Life Insurance Types
Group life insurance policies offered by corporations to employees have distinct tax treatments. Group-term life insurance, defined by the Internal Revenue Service (IRS), provides a death benefit without accumulating cash surrender value. It is a pure insurance product, paying out only upon the insured’s death.
Other group life policies, unlike group-term, may include cash value components, similar to whole or universal life insurance. These policies allow for savings or investment value accumulation, differing from pure protection. Cash value features significantly alter the tax landscape for both the corporation and the employee.
Employee Tax Treatment
Employee tax treatment for group life insurance depends on coverage type and amount. For group-term life insurance, the first $50,000 of employer-provided coverage is tax-free. This exclusion applies uniformly.
Coverage exceeding $50,000 results in “imputed income” to the employee, which is taxable. This cost is calculated using IRS Table 2007, based on age. For example, monthly costs per $1,000 of excess coverage range from $0.05 for employees under 25 to $2.06 for those 70 and over, as per Income Tax Regulations section 1.79-3.
If a policy is not group-term life insurance, such as one with cash surrender value, employer-paid premiums are generally taxable compensation to the employee. These policies do not benefit from the $50,000 exclusion; the full premium amount is includible in gross income.
Full taxation applies because cash value policies offer benefits beyond death protection, often including an investment or savings component. The policy’s nature determines tax implications for the employee.
Corporation Tax Treatment
Corporation tax treatment for employee group life insurance premiums varies by policy type and beneficiary. Premiums for group-term life insurance are generally tax-deductible as a business expense, provided the corporation is not the policy’s direct or indirect beneficiary. The insurance must primarily benefit the employee’s designated beneficiaries.
If the corporation is the direct or indirect beneficiary, such as in “key person” insurance, premiums are not deductible. The corporation receives the death benefit, making premiums a capital expenditure.
For non-group-term policies, like those with cash value, premiums paid by the corporation are generally not deductible. This applies to policies with investment or savings elements. If the corporation retains rights to the policy’s cash value or can borrow against it, the premiums are typically non-deductible.
Employer Reporting Obligations
Corporations providing group life insurance must meet reporting obligations. Imputed income for group-term life insurance coverage over $50,000 must be reported on the employee’s Form W-2, in Box 1 and identified in Box 12 with code “C.”
This imputed income is subject to Social Security and Medicare taxes (FICA) but generally not federal income tax withholding. Employers must withhold the employee’s FICA share and pay their own share on this imputed income.
If employer-paid premiums for other group life policies result in taxable income, such as permanent life insurance with cash value, these amounts are also reported as regular wages on Form W-2. These premiums are subject to federal income tax withholding, Social Security, and Medicare taxes.
Citations:
26 CFR § 1.79-3 – Uniform premium table. (n.d.). [Online]. Available: https://www.law.cornell.edu/cfr/text/26/1.79-3. [Accessed: 26-Aug-2025].
Distinguishing Group Life Insurance Types
Group life insurance policies offered by corporations to employees generally fall into distinct categories, each with unique characteristics that influence their tax treatment. The most common type is group-term life insurance, which the Internal Revenue Service (IRS) defines by specific criteria. This type of policy provides a general death benefit to a group of employees and does not accumulate cash surrender value. It is typically a pure insurance product, meaning it only pays out upon the death of the insured.
Other group life insurance policies exist that differ fundamentally from group-term life insurance, often incorporating features beyond a simple death benefit. These can include policies with a cash value component, similar to whole life or universal life insurance. Such policies may allow for the accumulation of savings or investment value over time, distinguishing them from the pure protection offered by group-term policies. The presence of cash value or other investment-like features is a key differentiator, as it significantly alters the tax landscape for both the corporation and the employee.
Employee Tax Treatment
Employee tax treatment for group life insurance coverage depends on the type and amount. For group-term life insurance, the cost of the first $50,000 of coverage provided by an employer is generally excluded from gross income and is tax-free. This exclusion applies uniformly.
When group-term life insurance coverage exceeds $50,000, the cost above this threshold is “imputed income” to the employee and becomes taxable. This imputed income represents the economic benefit from employer-paid premiums for excess coverage. The taxable cost is calculated using IRS Table 2007, which provides rates based on the employee’s age group. For example, monthly costs per $1,000 of excess coverage range from $0.05 for employees under 25 to $2.06 for those 70 and over, as per Income Tax Regulations section 1.79-3.
If the group life insurance policy is not classified as group-term life insurance, such as one with a cash surrender value, employer-paid premiums are generally taxable compensation to the employee. Unlike group-term life insurance, these policies do not benefit from the $50,000 exclusion. The full employer-paid premium is typically includible in the employee’s gross income.
This full taxation applies because policies with cash value provide a benefit beyond pure death protection, often including an investment or savings component. The tax implications for the employee are determined by the policy’s nature and whether it qualifies as group-term life insurance under IRS regulations.
Corporation Tax Treatment
Corporation tax treatment for employee group life insurance premiums varies based on policy type and beneficiary designation. Generally, premiums paid for group-term life insurance are tax-deductible as an ordinary and necessary business expense. This deductibility is contingent upon the corporation not being the direct or indirect beneficiary. The primary purpose of the insurance must be to provide a death benefit to the employee’s designated beneficiaries, rather than to serve the business’s financial interests.
If the corporation is the direct or indirect beneficiary, premiums paid are not deductible. This often arises in “key person” insurance, where the company holds a policy on a vital employee to mitigate financial loss. The corporation receives the death benefit, so premiums are a capital expenditure, not a deductible business expense.
For non-group-term life insurance policies, such as those with a cash value component, premiums paid by the corporation are generally not deductible. This applies particularly to policies like group permanent life insurance, which often include an investment or savings element. If the corporation retains any rights to the policy’s cash value or can borrow against it, the premiums are typically non-deductible.
Employer Reporting Obligations
Corporations providing group life insurance to their employees have specific reporting obligations. Imputed income for group-term life insurance coverage exceeding $50,000 must be reported on the employee’s Form W-2, included in Box 1 and identified in Box 12 with code “C.”
Imputed income from group-term life insurance coverage over $50,000 is subject to Social Security and Medicare taxes (FICA), but generally not federal income tax withholding. Employers are responsible for withholding the employee’s FICA share and paying their share on this imputed income.
If employer-paid premiums for other group life policies result in taxable income, such as permanent life insurance with cash value, these amounts are reported as regular wages on Form W-2. These premiums are subject to federal income tax withholding, Social Security, and Medicare taxes.