Employer payments of premiums on group-term life insurance policies of up to $50,000 are not taxable. You are only taxed on the cost of premiums for coverage that exceeds $50,000. If any amount of life insurance premiums is taxable it will be reported as wages in Box 1 of Form W-2 and separately labeled in Box 12 of Form –W with Code “C”. Individuals cannot avoid this tax by assigning the life insurance policy to another person. The amount included in wages is reduced dollar for dollar by any part of the payment made by employees.
Individuals who retired prior to 1984 at a normal retirement age or on disability are not taxed on premium payments made by their employer, even if the coverage is over $50,000. This is also true for employees who retired after 1983 because of disability and remained covered by their company’s plan. If you retired after 1983 and are not disabled there are certain tests to meet in order to qualify for tax-free coverage over $50,000:
Taxpayers who (1) own more than 5% of a company, (2) own more than 1% of a company and earn over $150,000, or (3) are an officer of a company and earn over $170,000 are considered “key employees”. The $50,000 limit for group-term life insurance premiums may not apply to key employees unless the plan meets nondiscriminatory tests.
Group-term life insurance polices paid by your employer for your spouse or dependents is considered a tax-free de minimis fringe benefit if the policy is $2,000 or less. Policies over $2,000 are considered taxable income.