8783 / How is it determined whether the cost of group-term life insurance provided under a Section 79 plan exceeds the $50,000 excludable limit?
The cost of up to $50,000 of group-term life insurance coverage generally is tax-exempt under IRC Section 79 (see Q 8782). The cost of coverage in excess of $50,000 is taxable to the employee in most situations (see Q 8784 for a discussion of the exceptions).
In calculating the cost of coverage, an employee who has more than one employer must combine all group-term coverage and is entitled to exclude only $50,000 of the combined coverage. If an employee contributes toward the cost of the insurance, all of the employee’s contribution for coverage will be subtracted from the amount that would otherwise be taxable.1 The employee cannot carry over any unused portion of his or her contributions from year to year.
The taxable cost of coverage in excess of $50,000 must be calculated on a monthly basis. The steps are as follows:
(1) Determine the total amount of group-term life insurance coverage for the employee in each calendar month of the employee’s taxable year, and if a change occurs during any month, take the average at the beginning and end of the month;