This section of the Internal Revenue Code outlines which group term life plans are subject to income taxation. This income tax applies to employer-paid life plans in excess of $50,000 for employees, those offering more than $2,000 in benefits for dependents, or discriminatory plans. But few people realize that voluntary life plans, paid for by the employee, can be subject to Section 79 taxation as well.
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.
First Things First
Before we get started, we need to talk about ALL your group-based life insurance policies. Section 79 allows the first $50,000 of coverage to be tax-free, as long as the plan does not discriminate in favor of Key Employees. This $50,000 exemption can only be used once per year – so if an employee has more than one policy, the total value of all coverage needs to be aggregated together for Section 79 tax purposes.
Pre-tax vs Post-tax
The quickest way to a required imputed income on employee-paid life coverage is having the employee pay the premiums pre-tax. Just don’t do it. Have employees pay for their voluntary coverage with post-tax dollars. Yes, technically you can have employees pay for the first $50,000 with pre-tax dollars (or less, if you also provide them with some coverage). But why put yourself through that kind of hassle to save a few dollars annually?