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EMPLOYER TAX BRIEF
Why employers are taking another look at life insurance as a fringe benefit
It can involve teaching workers additional skills in areas related to but outside their current positions to help fulfill the employer’s existing or anticipated needs. Or it can simply give employees access to learning that will help them progress in their careers, either with their current employer or elsewhere.
Employer upside
For you, the employer, the upside is considerable. Premiums you pay for group term life insurance are generally tax-deductible and, because claims occur so infrequently, the coverage is typically simple and inexpensive to administer compared with other fringe benefits. When covered employees do pass away, the paperwork is fairly straightforward.
But perhaps the most important reason to consider offering life insurance as a fringe benefit is that employees want it. In fact, almost half of those who responded to MetLife’s 15th Annual U.S. Employee Benefit Trends Study, published in 2017, called life insurance a “must-have” benefit.
With the mounting concern among workers about financial wellness, life insurance is especially appealing to those with children or other dependents. Having it can reduce stress, strengthen organizational loyalty and increase productivity.
Employee costs
The potential perks for employers are many, including:
- For employees, group term life insurance usually isn’t a taxable benefit. More specifically, the cost of the first $50,000 of coverage you provide generally is tax-exempt for the covered employee if you meet certain conditions. But you must include in the employee’s income the cost of coverage exceeding $50,000, less any amounts the employee paid toward the coverage. The amount included in income is also subject to payroll taxes (Medicare and Social Security, or FICA).
- What if you provide coverage for an employee’s spouse or dependent? The cost of such group term life insurance coverage is tax-exempt to the employee if the coverage doesn’t exceed $2,000. If it does, the entire cost of coverage generally is taxable.
Note: The cost of coverage for tax purposes is calculated according to an IRS table, not the actual premiums paid.
Eligible participants
Once you decide to offer life insurance, you’ll have to determine which employees will be eligible. The more insured employees, the lower the rates you’ll pay.
Bear in mind that, if you offer the benefit only to key employees or in a way that favors key employees, it probably will be taxable to them because you’ll have trouble satisfying the IRS nondiscrimination requirements. The cost also would be subject to payroll taxes, and you’ll risk alienating the rank and file.
A valuable tool
All in all, group term life insurance is a worthwhile benefit to consider adding to the mix. Structured properly and combined with other desirable benefits, it can prove a valuable tool to boost recruitment and retention. We can provide you with more information on the tax impact and advantages of life insurance, as well as other fringe benefits to consider.