The Mutual Benefits Of Providing Group-Term Life Insurance To Employees
Posted on: 21 October 2015
Companies with employees find that employee job satisfaction is usually enhanced by the availability of fringe benefits. In addition to being a deductible expense to the business, certain types of fringe benefits are not taxable to employees. Employers may reduce taxes for themselves and for their employees by providing group-term life insurance benefits.
A fringe benefit is essentially a form of employee pay. However, group-term life insurance is usually not considered to be wages and is not subject to tax withholding. Group-term life insurance may reduce the overall cost of your payroll and increase the total value of compensation received by your employees.
Employee benefits
Employees are generally not required to pay income tax on group-term life insurance coverage of up to $50,000. Employees also pay no Social Security or Medicare tax on the value of nontaxable group-term life insurance coverage received.
A much smaller tax benefit is available for providing group-term life insurance coverage for the spouse or dependents of your employees. Up to $2,000 in group-term life insurance coverage for the spouse or a dependent of an employee is considered a nontaxable fringe benefit. If the $2,000 coverage limitation is exceeded, the entire spouse or dependent coverage may become taxable.
Employer benefits
Employers typically must contribute amounts to match the Social Security and Medicare tax withheld from the pay of employees. For group-term life insurance benefits paid to employees, employers are not required to pay Social Security or Medicare taxes unless they pay for over $50,000 in coverage for any employee.
If an employer pays the cost of group-term life insurance coverage exceeding $50,000, the additional cost is equivalent to wages. The additional cost is taxable, and both employee and employer pay Social Security and Medicare taxes on the excess coverage.
Shared costs
Companies are not required to pay the total amount of the premiums for group-term life insurance themselves. You may require that employees contribute a portion of the cost. Some employees may elect to pay for additional coverage in excess of the $50,000 coverage limit. Regardless of how the cost may be shared, the $50,000 coverage exclusion remains in place for both the employer and the employee.
There are additional requirements to providing group-term life insurance, especially in regard to preferential treatment of key employees. Workers may also be categorized by their length of time on the job and number of hours worked per week. Contact an employee benefits specialist for more information about the tax advantages of providing group-term life insurance to your employees.
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