Group-Term Life Imputed Income Under Section 79
Employer-paid group life coverage above $50,000 creates taxable imputed income for employees. The calculation uses an IRS table, and payroll has to report it correctly.
How the $50,000 Exclusion Works
The first $50,000 of employer-provided group-term life coverage is tax-free to the employee. The cost of coverage above that amount is taxable income.
The Exclusion
Group-term life coverage up to $50,000 is excluded from an employee’s income under Section 79 when the plan meets the requirements. The exclusion depends on the plan meeting the tax rules, including nondiscrimination requirements. Employers should confirm with a tax adviser that their group-term policy qualifies before assuming the full amount is excluded. You can test your own figures with our supplemental life insurance cost calculator. Employer-paid health coverage has its own exclusion rules, covered in how employees are taxed on employer-paid health insurance.
Imputed Income
The cost of coverage above $50,000 is treated as income, even though no cash is paid. It is calculated with an IRS table, not the employer’s actual premium. Employees usually see this as extra taxable wages on their pay stub or W-2 even though no cash was received. HR should explain it to affected employees before the first payroll with the added amount.
IRS Table 2-2
Publication 15-B sets a monthly cost per $1,000 of coverage by age bracket. For 2026 the rates run from $0.05 to $2.06 per $1,000 per month. Because the table is the IRS’s schedule, the figure may differ from what the employer pays the insurer. Payroll should use the current published table and confirm each year that rates have not changed.
Employee Contributions
The cost is reduced by any after-tax amounts the employee pays toward the coverage. Pre-tax payments do not reduce it. Only after-tax payments reduce the imputed amount, so payroll needs to know how each contribution is taken. Review deduction codes with your payroll provider to make sure the calculation is right.
Age Is Determined at Year End
Payroll should use the employee’s age at the end of the tax year to select the table rate. Confirm the method with your payroll provider. An employee who has a birthday late in the year may move to a higher bracket for the full year. Ask your payroll provider whether the system applies the age rule consistently.
Aggregation
The $50,000 limit applies across all employer group-term policies for the employee, so multiple plans must be considered together. Employees may have coverage under more than one employer-provided policy, such as a base plan and a separate executive plan. Payroll should total all policies before calculating the amount above the limit.
Payroll Tax and W-2 Reporting
Imputed income is easy to miss because no money moves. It is a common payroll audit finding.
Social Security and Medicare
The imputed amount is subject to Social Security and Medicare tax, so it must be added to wages for those taxes each pay period or as the payroll system is configured. Because these taxes apply to the imputed amount, both employer and employee pay their share. Ask your payroll provider how it handles the timing of the added wages.
W-2 Reporting
Report the taxable cost above $50,000 in W-2 box 12 with code C, and include it in the wage boxes as your payroll provider directs. Reporting practice can vary by payroll system, so ask your provider how amounts are entered and test it with a sample employee. Compare year-end figures with the calculation worksheet.
Payroll Set-Up
Provide payroll with coverage amounts, ages, and any employee contributions. Changes in salary-based coverage can change the imputed amount. Give payroll an updated list each time coverage amounts, salaries or ages change. A short monthly or quarterly check helps catch errors before they appear on year-end forms.
Terminated Employees
Coverage continued for former employees can also create imputed income. Make sure payroll knows who still has coverage. Employees who keep coverage after leaving may still owe tax on the cost above the limit. Confirm with a tax adviser how the plan and payroll should handle former employees.
Spouse and Dependent Coverage
Employer-paid coverage for a spouse or dependent has its own rules. Confirm treatment with a tax advisor before assuming it is excluded. Rules for spouse and dependent coverage can depend on the amount and the plan terms. A tax adviser can confirm what is excluded and what should be reported as income.
Audit Readiness
Keep the calculation work, the policy certificate, and the payroll records together so a reviewer can trace each W-2 entry. Include dated worksheets, rate tables used and any notes about adjustments. A simple folder for each tax year makes it easier to answer questions from auditors or payroll providers.
The Key Employee Rule
If a group-term plan discriminates in favor of key employees, they lose the $50,000 exclusion.
Who Is a Key Employee
Generally an officer with compensation above $235,000, a 5 percent owner, or a 1 percent owner with compensation above $150,000. The definition has several parts and is applied using specific compensation and ownership tests. Employers should have a tax adviser confirm who counts as a key employee for the plan year.
The Consequence
When the plan is discriminatory, key employees are taxed on the greater of the actual cost or the table cost of all their coverage, with no $50,000 exclusion. This is a significant tax cost for executives, so the plan’s design matters. Employers should ask a tax adviser to review the plan before it is offered and again when it changes.
Design Check
Review eligibility, benefit formulas, and coverage amounts with your broker before adding executive-only or tiered benefits. Plans that favor a small group can raise tax issues for executives. Share your proposed design with your broker and a tax adviser before communicating it to employees.
Voluntary and Supplemental Coverage
Employee-paid supplemental life is treated differently. See our guides on supplemental life and plan design for how each layer fits together. Employers should keep voluntary coverage separate in payroll and plan documents so the right tax treatment applies to each layer. Ask a tax adviser if any coverage is paid partly by the employer.
Group-Term Life Imputed Income Questions
What is the Section 79 exclusion amount?
$50,000 of employer-provided group-term life coverage.
How is imputed income calculated?
Take coverage above $50,000, divide by $1,000, multiply by the Table 2-2 monthly rate for the employee’s age bracket and by the months of coverage, then subtract after-tax employee contributions.
Which taxes apply to the imputed amount?
Social Security and Medicare taxes apply. It is also reported on the W-2.
Where does it appear on the W-2?
In box 12 with code C.
Does the actual premium matter?
No. The IRS table is used for the calculation, not the premium the employer pays.
What is a key employee?
Generally an officer with compensation above $235,000, a 5 percent owner, or a 1 percent owner with compensation above $150,000.
What happens if the plan is discriminatory?
Key employees lose the $50,000 exclusion and are taxed on the greater of actual or table cost of all their coverage.
Do pre-tax employee payments reduce imputed income?
No. Only after-tax employee contributions reduce the cost.
Is this legal advice?
No. This page is general information, not legal advice. Rules change and facts differ, so confirm your situation with your attorney or tax advisor.
Related Guides
Related reading: Group Life and AD&D Plan Design · Supplemental Life and Disability · Voluntary Ancillary Benefits · Non-Discrimination Testing · Payroll Integration
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Laws and rules referenced
26 U.S.C. § 79 and 26 C.F.R. § 1.79-3 — Group-term life insurance: the first $50,000 of coverage is excluded and the cost above it is imputed using the uniform premium table in the regulation (https://www.law.cornell.edu/cfr/text/26/1.79-3).
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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