If a corporation pays the premium on a group life policy for its employees, how much additional taxable income is the corporation required to report for each employee?
The Correct Answer and Explanation is :
When a corporation pays the premium on a group life insurance policy for its employees, the taxation of these benefits can vary based on the structure of the policy and the amount of coverage. Generally, the corporation is not required to report any additional taxable income for each employee as a result of paying premiums on group life insurance policies, provided that the coverage does not exceed $50,000.
Tax Implications of Group Life Insurance:
- Coverage Limits: Under IRS regulations, if the group life insurance coverage is $50,000 or less, the cost of the coverage paid by the employer is not taxable to the employee. This means that neither the premiums paid by the corporation nor the death benefits received by the employee’s beneficiaries are subject to income tax.
- Imputed Income: If the coverage exceeds $50,000, the employee must report the cost of the coverage as taxable income. The IRS requires that the employer calculate the imputed income based on the excess coverage over $50,000. This imputed income is determined using IRS tables that take into account the employee’s age and the amount of insurance over the threshold.
- Reporting Requirements: The employer must report this imputed income on the employee’s Form W-2. This ensures that employees are aware of any additional income they need to report when filing their taxes.
- Tax-Free Benefits: Regardless of the premiums paid, the death benefits from the group life insurance are generally paid out tax-free to the beneficiaries. This feature makes group life insurance an attractive benefit for both employers and employees.
In summary, if the employer pays premiums on a group life policy and the coverage is $50,000 or less, there is no additional taxable income for the corporation to report for each employee. However, if the coverage exceeds that limit, the employer must calculate and report the imputed income for the excess amount as required by IRS regulations.