If your job includes employer-paid group term life insurance, you may be surprised to learn that a portion of the premiums could be taxable. This can lead to unexpected income tax consequences.
The $50,000 Threshold
The IRS allows you to exclude the cost of the first $50,000 of employer-provided group term life insurance from your taxable income. However, any coverage beyond that limit is taxable. The employer-paid cost of coverage over $50,000 is considered part of your taxable wages, even though you might never directly benefit from it. This is sometimes referred to as “phantom income,” because it’s income you don’t actually receive but still get taxed on.
Have You Reviewed Your W-2?
To see if your employer-provided life insurance is taxable, check your W-2. Look at Box 12 — if you see an amount with the code “C,” that’s the taxable portion of your group term life insurance coverage over $50,000. This amount is included in your total wages in Box 1, which is reported on your tax return. Additionally, you’re responsible for paying taxes on this amount, including employment taxes.
Evaluating Your Options
If you feel the tax cost of your group term life insurance is too high for the benefit you receive, there are steps you can take. Start by asking your employer if they offer a “carve-out” plan, which allows employees to opt out of group coverage above the $50,000 threshold.
If your employer doesn’t currently offer this option, you could suggest they create one. In a carve-out plan, the employer might continue to provide up to $50,000 of coverage tax-free and offer alternatives for the excess coverage, such as:
- An individual life insurance policy for the remaining coverage, or
- A cash bonus representing what the employer would have spent on the excess coverage, allowing you to purchase an individual policy.
We're Here to Help
If you have questions about your employer-provided life insurance, or need help navigating the tax implications, feel free to reach out. We’re here to assist you in making the best choices for your financial situation.
The HoganTaylor Tax Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
