An employer pays the entire premium for $80,000 of group term life insurance on an employee. How is the coverage treated for federal income tax purposes?

Why A is correct

Under IRC Section 79, the employer-paid cost of group term life insurance on an employee is tax-free up to $50,000 of face amount. The cost of coverage in excess of $50,000 must be included in the employee's gross income, calculated using the IRS uniform premium table based on the employee's age. The death benefit itself remains income-tax-free to the beneficiary under IRC Section 101(a). Any employee contribution toward the premium reduces the amount that must be included. Advisors must explain this rule so employees understand that employer-paid group term coverage above the threshold has tax consequences, even though the death benefit remains tax-free.

Why the other options are wrong

• B) Only the first $50,000 of employer-paid group term coverage is excluded from income; the cost of the excess is taxable, so not all $80,000 is free. The excess over $50,000 is includible, so the full amount cannot escape taxation.
• C) The premium is not fully taxable; only the imputed cost of the coverage above $50,000 is added to the employee's income. Only the imputed cost of the excess is taxed; the premium itself is not treated as wages.
• D) The death benefit payable to the beneficiary is still tax-free under Section 101(a); the $50,000 rule affects premium treatment, not the death benefit. The benefit to the beneficiary remains exempt; the Section 79 rule never reaches the death proceeds.

Memory hook

$50K rides free on the employer's tab; the cost of the rest shows up in your income.