My name is Eric Bowman, and if you have questions about insurance, this is the blog you need to read. I was always confused when I had to purchase insurance. I would either end up paying for insurance I didn't need or I wouldn't buy the right policy. I finally decided that I was going to learn all I could about insurance policies so that I would understand exactly what I was buying. Now, I am completely satisfied with my insurance and the coverage is just what I need. I realized that there are others who are probably just as confused as I was, so I am writing this blog to help others get the best insurance for their needs and budget. I hope that my blog gives you the information you need to make the right choices when purchasing insurance.
For company workers who support families, the receipt of life insurance coverage may be viewed as the equivalent of wages. Business owners can receive a tax benefit while also increasing the job satisfaction of their employees by providing group life insurance.
Certain types of fringe benefits receive preferential tax treatment. Within limitations, the cost of group life insurance provided to an employee is not taxable. The cost is deductible by an employer as a routine cost of doing business. The immediate benefit to an employer is that the cost is deducted differently than wages and is usually not subject to payroll taxes.
Tax benefit threshold
An employee can generally receive up to $50,000 in group life insurance coverage tax-free. For coverage up to $50,000, there is no withholding requirement for an employee or your company. As an employer, you consequently have no matching contribution requirement for Medicare tax or Social Security tax until coverage exceeds the $50,000 threshold.
Group life insurance is a form of term insurance, generally provided to your current employees on a year-to-year basis. Your total cost of group coverage is likely to be considerably less than what your employees could individually purchase on their own. You may choose to offer coverage under a cost-sharing arrangement, with your portion of the cost receiving preferential tax treatment.
Cost sharing provides an incentive for employees to participate in a group life insurance plan. The portion of the cost borne by an employee is paid on an after-tax basis, essentially from net wages. The most straightforward method for collecting any employee portion of the cost is through payroll deductions.
Year-end Form W-2
Coverage over $50,000 is considered to be wages paid and is subject to withholding and payroll taxes. The value of group life insurance coverage over $50,000 is taxable to an employee and needs to be reported on IRS Form W-2 provided to the employee at the end of the year.
Any taxable portion of group life insurance coverage received by an employee is reported as wages on their Form W-2, along with related tax withholding. Box 12 of Form W-2 should contain the code C, along with the taxable portion of the cost.
There are additional regulations regarding the purchase of a group life insurance policy, especially in regard to discriminatory treatment of various worker classifications. Many owners of S corporations cannot be classified as an employee. Contact an insurance consultant for information on establishing a group life insurance plan.