Group life insurance for employees: how it works and what it costs you

Group life insurance is a single term life policy that covers eligible employees under one master contract, usually as a flat amount or a multiple of salary. The employer typically pays for a base benefit and may offer extra voluntary coverage at the employee's cost. The two things an employer most often misses are the tax rule on coverage over $50,000 (imputed income) and the loss of coverage when someone leaves the company.

How a group term life plan is built

The employer holds a master policy, and each covered employee receives a certificate. The key design choices are:

• Benefit amount. Either a flat amount (for example, $25,000 for everyone) or a multiple of annual earnings (one or two times salary), often with a maximum. A schedule that gives different amounts to different classes, such as owners and managers, must satisfy the nondiscrimination rules discussed below.
• Eligibility. Usually full-time employees (often 30 hours a week) after a waiting period, with a definition tied to the carrier's participation rules.
• Who pays. Non-contributory plans (employer pays everything) usually require 100% participation of eligible employees. Contributory plans, where the employee pays part, typically require a minimum participation share, commonly a majority of eligible employees.
• Age reductions. Benefits often reduce at stated ages (for example, 65 and 70). The schedule is in the certificate; check it if you have an older workforce.
• AD&D. Accidental death and dismemberment is usually bundled and pays an additional benefit if death or loss results from an accident, subject to exclusions. It is not a substitute for life insurance.
• Dependent coverage. Spouse and child coverage is generally a small flat amount, sometimes available as a voluntary add-on.
• Voluntary supplemental life. Employees buy additional coverage at their own cost, with guaranteed issue up to a limit and evidence of insurability above it. See voluntary benefits: what they are and how they work for how voluntary products are administered.

Underwriting and pricing

Group life is rated by the carrier on the age and sex mix of the group, the amount of coverage, industry and, for larger groups, claims experience. For a small group, insurers commonly use a guaranteed issue limit, meaning employees get coverage up to a stated amount without health questions if they enroll in their first eligibility window. Late enrollees or amounts above the limit require evidence of insurability. Because the rate is blended, younger employees subsidize older ones, and the rate rises when the group ages. Rates are usually guaranteed for one to three years and are reviewed at renewal.

Employers get better results when they ask three questions up front: what is the guaranteed issue amount, how is the rate guaranteed, and what happens when the group changes size. A carrier may reprice if participation drops or a significant number of employees leave.

Features worth reading in the certificate

• Waiver of premium. If an employee becomes totally disabled before a stated age, the coverage can continue without premium. The disability definition is the one to read.
• Accelerated death benefit. Lets a terminally ill employee draw part of the benefit early. Terms and tax treatment vary.
• Conversion. The employee can convert to an individual policy without evidence of insurability when coverage ends, usually within 31 days. Conversion is expensive because the policy is priced for people who are in poor health.
• Portability. Some plans let the employee continue the group coverage at group rates after leaving, at the employee's expense. Portability rules vary by carrier and by state; ask whether the plan offers it.
• Beneficiary designations. Employees name beneficiaries on the carrier's form, not in the will. Out-of-date designations are the most common cause of paying the wrong person. Make updating them part of every life event and annual enrollment.

The tax rule: imputed income over $50,000

Under Section 79 of the Internal Revenue Code, the cost of employer-provided group-term life coverage up to $50,000 is excluded from the employee's income. For coverage above $50,000, the cost, measured by an IRS table rather than your actual premium, is taxable wages. According to IRS Publication 15-B (2026), it is subject to Social Security and Medicare tax but not income tax withholding or FUTA, and it is reported in boxes 1, 3 and 5 of Form W-2, and also in box 12 with code C. Any amount the employee pays toward the coverage with after-tax money reduces the amount included.

The 2026 monthly cost per $1,000 of protection, from IRS Publication 15-B (2026) Table 2-2, depends on age at the end of the year:

A hypothetical calculation

Say an employee aged 56 has $150,000 of employer-paid group-term life and pays nothing toward it. The first $50,000 is excluded, leaving $100,000. The yearly imputed income is 100 (thousands) times $0.43 times 12 months, or $516. The employer includes $516 in the employee's wages, withholds Social Security and Medicare tax on it, and reports it on the W-2 with code C. The employee's only practical cost is a small amount of payroll tax. The employer has no income tax withholding obligation on the imputed amount, but it does owe its share of FICA. See group-term life over $50,000: imputed income and how to calculate it for more examples and payroll steps.

Other rules from the same publication that come up in audits:

• Employer-paid dependent coverage is excludable as a de minimis fringe benefit if the face amount is $2,000 or less.
• Key employees (in 2026, an officer with pay over $235,000, a 5% owner, or a 1% owner with pay over $150,000) lose the $50,000 exclusion entirely if the plan favors key employees in participation or benefits. The plan generally passes the participation test if it benefits at least 70% of employees, or at least 85% of participants are not key employees, or it meets another non-discriminatory classification.
• A 2% shareholder of an S corporation is not treated as an employee for this exclusion, so all group-term life provided to that person is taxable wages.
• If coverage continues after an employee leaves, the former employee owes Social Security and Medicare tax on the imputed amount, and the employer reports the uncollected tax separately in box 12 using codes M and N.

ERISA and administration

A group life plan is an employee welfare plan under ERISA. In practice that means a plan document and summary plan description (carriers usually supply the certificate and a wrap document), a Form 5500 filing once the plan reaches 100 participants (fully insured plans under 100 are generally exempt; see form 5500 for health and welfare plans: who files and when), and fiduciary duties for the people who select the carrier and handle claims (fiduciary liability). Group-term life is a permitted benefit in a cafeteria plan, but the Section 79 imputed income calculation still applies, so payroll and the plan administrator need to coordinate.

Group life versus other life products

Group coverage is cheap and easy but not a substitute for the owner's own planning. It ends with employment, is typically limited to a modest multiple of salary, and does not protect the business. For the business, look at key person insurance: protecting the business from a loss of talent and, for co-owners, Funding a buy-sell agreement with life insurance after Connelly. For executives, employers sometimes use split-dollar or corporate-owned life arrangements, which carry their own tax and notice requirements. building an employee benefits package that fits your budget explains where group life fits among health, disability and retirement benefits, and group short- and long-term disability insurance for employers covers the income side.

Key takeaways

• Group term life is a master policy with certificates; benefit design, participation rules and guaranteed issue limits drive both cost and administration.
• Coverage above $50,000 creates imputed income, calculated from the IRS Table 2-2 rates, not from what the carrier charges you.
• The 2026 table runs from $0.05 per $1,000 per month under age 25 to $2.06 at 70 and older, per IRS Publication 15-B.
• Key employees and 2% S corporation shareholders get less favorable treatment.
• Coverage ends with employment unless the employee uses conversion or portability, so tell departing employees their options in writing.