8784 / Are there any exceptions to the general rule that an employee may only exclude the first $50,000 of group-term life insurance provided under a Section 79 plan?

Yes. There are certain exceptions to the $50,000 ceiling on tax-exempt coverage. The cost of group-term life insurance, even for amounts over $50,000, is tax-exempt in the following situations:

(1)  The insurance is provided to a former employee who:

(a)  has terminated his or her employment as an employee with the employer and has become permanently disabled,

(b)  has terminated his or her employment on or before January 1, 1984, and was covered by the plan or by a predecessor plan when he or she retired if the plan was in existence on January 1, 1984, or the plan is a comparable successor to such a plan, or

(c)  has terminated employment as an employee after January 1, 1984, having attained age 55 on or before January 1, 1984, and having been employed by the employer at any time during 1983 if the plan was in existence on January 1, 1984, or the plan is a comparable successor to such a plan, unless the individual retired under the plan after 1986 and the plan is discriminatory after that date, not taking into account insurance provided to employees who retired before January 1, 1987;

(2)  If a charitable organization is designated as policy beneficiary, where this designation may be made with respect to all or any portion of the proceeds, but no charitable contributions deduction is allowable for such a designation; or

(3)  If an employer is beneficiary (directly or indirectly), unless the employer is required to pay proceeds over to an employee’s estate or beneficiary.¹

Any contribution toward group-term life insurance, but not toward permanent benefits, made by an employee during a taxable year generally reduces, dollar for dollar, the amount that otherwise would be included in the employee’s gross income for term insurance. This reduction is not permitted, however, if the employee makes a prepayment for coverage after retirement or for payments allocable to insurance where the cost is not taxed because of one of the exceptions outlined above.²

The exemption of the cost of up to $50,000 of group-term life is not available with respect to group-term insurance purchased under a qualified employees’ trust or annuity plan. The provisions of IRC Section 72(m)(3) and Treasury Regulation Section 1.72-16 apply to the cost of the protection purchased under qualified plans and no part of the cost is excludable from an employee’s gross income.³

Premiums for supplemental insurance in excess of $50,000 provided by an employer under a group-term insurance plan are not taxable to an insured employee when paid by a family member to whom the employee has assigned the insurance.⁴ If the cost of the coverage in excess of $50,000 is shared by an employer and assignee, the employer’s portion of the cost is includable in the insured employee’s gross income.⁵