8769 / Are life insurance premiums paid by an employer taxable income to an insured employee if the proceeds are payable to the employee’s estate or personal beneficiary and the policy is owned by the employee?

The premium payments are generally treated as additional compensation paid to the employee and are, therefore, deductible by the employer. However, if the employer is a closely-held corporation and the employee a stockholder, the IRS may challenge the arrangement on the grounds that the premiums are disguised dividends taxable to the insured, but not deductible by the corporation (see Q 8765).

Even where an insured employee and owner of the corporation was not the owner of the policy, but the employee’s child or spouse was owner and beneficiary, payment of premiums on the policy was found to confer an economic benefit to the employee and, as such, was includable in the employee’s gross income.³

Where a stockholder-employee argued that premiums paid by the corporation on the employee’s personal insurance were merely loans, the premiums were treated as taxable dividends. This will be the result unless the employee can produce evidence to show that the employee intended to reimburse the corporation for the premium payments.⁴