Understanding the Tax Implications of Employer-Provided Life Insurance

1. If an employer provides group term life insurance coverage higher than $50,000, the excess amount is considered taxable income to the employee.
2. The cost of group term insurance is determined based on an IRS table, which can result in higher taxable income for older employees.
3. The taxable amount is reported on Box 12 of the Form W-2, and the employee is responsible for federal, state, and local taxes on this amount.
4. The amount in Box 12 is already included in the total wages reported in Box 1 of the W-2, which is reported on the tax return. – If the tax cost for group term insurance is too high for the benefit received, employees can ask their employer about a “carve-out” plan or suggest creating one.
– A carve-out plan can continue to provide a certain amount of group term insurance with no tax cost, and the employee can be given an individual policy for the remaining coverage, or receive a cash bonus to pay for the excess coverage.
– Employees with questions about group term coverage and its impact on their tax bill can contact taxinsights@nksfb.com or Richard Welling at rwelling@nksfb.com for more information.

The Tax Consequences of Employer-Provided Life Insurance