Section 79 – Employer-Paid Term Life • July, 2014

Does your company offer life insurance? The IRS requires employees to be taxed on the value of employer-provided group term life insurance in certain circumstances: amounts over $50,000 per employee, the full amount for discriminatory plans, and the full amount for some dependent life plans.  Of course there are different rules for each circumstance.

Small tax, large burden. While Section 79 tax is typically small, the burden is on the employer.  You must include the cost of coverage in the employee’s income.  After all, the IRS wants your employer portion of the tax, too.

IRC Section 79
The IRS has a 31-page publication outlining which forms of “pay for performance or services” are considered taxable income.  Group term life insurance is just one of the many fringe benefits outlined, and is commonly referred to as Section 79.

Imputed Income
Even though the employee receives no money directly, life insurance coverage itself has value and is therefore taxable as a form of income.  Life insurance coverage treated as income for tax purposes is called “imputed income.”  The imputed income for each employee is based on the employee’s age at the end of the calendar year and the amount of coverage to be imputed.  Imputed income is subject to income, Social Security, and Medicare payroll taxes.

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Taxation

Tax #1 – Over $50,000
For companies that provide more than $50,000 in employer-paid life insurance, amounts over $50,000 are considered a fringe benefit and are subject to imputed income.  If you offer more than one life policy, you’ll need to aggregate all values together – only one $50,000 exemption is allowed per year.

Tax #2 – Discriminatory Plans
You will be required to include ALL key employee life amounts in their imputed income if your plan is discriminatory (no $50,000 exclusion).  There are three types of discriminatory plans:

  • Those providing more coverage to key employees than non-key (when providing a “flat” dollar benefit)
  • Those covering less than 70% of full-time employees (you can exclude employees with < 3 years of service)
  • Those where more than 15% of the insureds are key employees

In 2017, a key employee is defined as an officer with annual pay greater than $175,000, a 5%+ owner, or a 1%+ owner whose annual pay was more than $150,000.

Tax #3 – Dependents
If your company pays for more than $2,000 in life coverage for employees’ dependents, you’ll need to include the FULL amount of the dependent life coverage in imputed income.

Calculating Imputed Income
TThe monthly “cost” of insurance to include in an employee’s wages is calculated using either the Table 1 rates or the actual rates for the coverage.  For nondiscriminatory plans, you use the Table 1 rates.  For discriminatory plans, you need to use either Table 1 rate or the actual rate, whichever is greater.

This article is provided for informational purposes only. Please contact your attorney and/or accountant to determine if this information may affect your business. © 2015 GHB Insurance

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