Tax Law for Group-Term Life Insurance Coverage
This exclusion applies to life insurance coverage that meets all the following conditions.
Group-term life insurance does not include the following insurance.
Employee. For this exclusion, treat the following individuals as employees.
Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
The 10-employee rule. Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year.
For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it.
Exceptions. Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance.
Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met.
Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met.
To apply either exception, do not consider employees who were denied insurance for any of the following reasons.
Exclusion from wages. You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. In addition, you do not have to withhold Federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee.
Exception for key employees. Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. (This exception generally does not apply to church plans.) When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you do not have to withhold Federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee.
For this purpose, the cost of the insurance is the greater of the following amounts.
For this exclusion, a key employee during 2004 is an employee or former employee who is one of the following individuals. See section 416(i) for more information.
A former employee who was a key employee upon retirement or separation from service is also a key employee.
Your plan does not favor key employees as to participation if at least one of the following is true.
Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans.
When applying this test, do not consider employees who:
Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay.
S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Include the cost in boxes 1, 3, and 5 of Form W-2. How ever, you do not have to withhold Federal income tax or pay Federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder.
Coverage over the limit. You must include in your employee's wages subject to social security and Medicare taxes the cost of group-term life insurance that is more than the cost of $50,000 of coverage, reduced by the amount the employee paid toward the insurance. Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, show it in box 12 with code C.
Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in the following table. Use the employee's age on the last day of the tax year. You must prorate the cost from the table if less than a full month of coverage is involved.
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