An employer provides an employee with $120,000 of group term life insurance and pays the full premium. For federal income tax purposes, the taxable economic benefit to the employee is based on:

Why C is correct

Under IRC §79, the cost of the first $50,000 of group term life insurance is excluded from the employee's gross income. Only the coverage above $50,000 — here $70,000 — produces a taxable economic benefit, and its value is measured using the IRS uniform premium rates rather than the actual premium paid. The taxable amount is reported as ordinary income to the employee each year. The exclusion is specific to group term life and does not extend to other types of coverage, such as whole life or permanent policies.

Why the other options are wrong

• A) The full premium is not taxed to the employee; the first $50,000 of coverage is excluded, and only the excess coverage is valued for tax purposes. The excluded slice stays untaxed.
• B) There is no one-half rule for group term life; the taxable amount is the table cost of the coverage exceeding $50,000. The full excess is what is taxed. There is no 50% shortcut.
• D) The future death benefit is not the measure of current taxable income; the employee is taxed on the current value of the excess coverage, not on the eventual payout.

Memory hook

Only coverage over $50k costs the employee on the tax return — via IRS table rates.