3.4 Group-Term Life Insurance Premiums

You are not taxed on your employer’s payments of premiums on a policy of up to $50,000 on your life. You are taxed only on the cost of premiums for coverage of over $50,000 as determined by the IRS rates shown in the table below. On Form W-2 your employer should include the taxable amount as wages in Box 1 and separately label the amount in Box 12 with Code C. You may not avoid tax by assigning the policy to another person.

If two or more employers provide you with group-term insurance coverage, you get only one $50,000 exclusion. You must figure the taxable cost for coverage over $50,000 by using the IRS rates below.

Regardless of the amount of the policy, you are not taxed if, for your entire tax year, the beneficiary of the policy is a tax-exempt charitable organization or your employer.

Filing Instruction

Uncollected Social Security and Medicare of Former Employees

If you receive coverage as a former employee, you must pay with Form 1040 on the line for “total tax” your share of Social Security and Medicare taxes on group-term life insurance over $50,000. The taxable amounts are shown in Box 12 of Form W-2, with Codes M and N.

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Your payments reduce taxable amount.

If you pay part of the cost of the insurance, your payment reduces dollar for dollar the amount includible as pay on Form W-2.

Retirees.

If you retired before 1984 at normal retirement age or on disability and are still covered by a company group-term life insurance policy, you are not taxed on premium payments made by your employer even if coverage is over $50,000. If you retired after 1983 because of disability and remain covered by your company’s plan, you are not taxed even if coverage exceeds $50,000. Furthermore, if you retired after 1983 and are not disabled, you may qualify for tax-free coverage over $50,000 if the following tests are met:

However, even if the three tests are met, you may be taxed under the rule below for discriminatory plans if you retired after 1986 and were a key employee.

Key employees taxed under discriminatory plans.

The $50,000 exclusion is not available to key employees unless the group plan meets nondiscrimination tests for eligibility and benefits. For 2012, key employees include those who during the year were: (1) more-than-5% owners; (2) more-than-1% owners earning over $150,000; and (3) officers with compensation over $165,000. If the plan discriminates, a key employee’s taxable benefit is based on the larger of (1) the actual cost of coverage or (2) the amount for coverage using the IRS rate table below.

The nondiscrimination rules also apply to former employees who were key employees when they separated from service. The discrimination tests are applied separately with respect to active and former employees.

Group-term life insurance for dependents.

Employer-paid coverage for your spouse or dependents is a tax-free de minimis fringe benefit (3.10) if the policy is $2,000 or less. For coverage over $2,000, you are taxed on the excess of the cost (determined under the IRS table below) over your after-tax payments for the insurance, if any.

Table 3-2 Taxable Premiums for Group-Term Insurance Coverage Over $50,000

*Age is determined at end of year.

Permanent life insurance.

If your employer pays premiums on your behalf for permanent nonforfeitable life insurance, you report as taxable wages the cost of the benefit, less any amount you paid. A permanent benefit is an economic value that extends beyond one year and includes paid-up insurance or cash surrender value, but does not include, for example, the right to convert or continue life insurance coverage after group coverage is terminated. Where permanent benefits are combined with term insurance, the permanent benefits are taxed under formulas found in IRS regulations.