An employer pays the full premium for $100,000 of group term life insurance on an employee. For federal income tax purposes:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under IRC Section 79, the cost of the first $50,000 of employer-provided group term life insurance is excluded from the employee's gross income. The imputed cost of coverage in excess of $50,000 must be included in the employee's taxable income, using a table of rates issued by the IRS. The death benefit of the group policy remains income tax free under IRC Section 101(a). This $50,000 threshold is a frequently tested tax fact. The rules apply to group term life insurance paid for by the employer; if the employee pays for the excess coverage, the employee's own contributions reduce the taxable amount.
Why the other options are wrong
- Only the first $50,000 of coverage is excluded; the cost of the coverage above $50,000 produces taxable income for the employee.
- Only the imputed cost of the coverage above $50,000 is taxed, not the entire premium paid by the employer.
- The group term death benefit remains income tax free to the beneficiary under IRC Section 101(a), regardless of the $50,000 threshold for premium cost.
Memory hook
$50,000 is the tax-free line for employer-paid group term. Above it, imputed income begins.