Group-term life over $50,000: imputed income and how to calculate it

When an employer provides group-term life insurance above $50,000 of coverage per employee, the cost of the excess coverage is taxable wages to the employee, calculated from the IRS Table I rate rather than the employer's actual premium. It is subject to Social Security and Medicare tax but not federal income tax withholding or FUTA. The employer reports it on Form W-2.

The rule

IRC 79 and Treasury Regulation 1.79-3 govern. Under IRS Publication 15-B (2026), the employee can exclude the cost of up to $50,000 of employer-provided group-term life insurance. The cost of coverage above $50,000, reduced by anything the employee paid for it with after-tax money, is included in wages. It is subject to Social Security and Medicare tax. It is not subject to federal income tax withholding or FUTA. Publication 15-B says the amount is reported in boxes 1, 3 and 5 of Form W-2 and shown in box 12 with code C.

The exclusion applies only to term-type coverage that meets the statute's requirements. A policy with a cash-value component, or one that provides a permanent benefit, has additional rules under Treasury Regulation 1.79-1, and the permanent portion is not group-term. If you offer such a policy, talk to the carrier and your tax adviser.

The 2026 Table I rates

The cost is computed from Table I, not from the premium paid. The regulation and Publication 15-B show the cost per $1,000 of protection for a one-month period, by the employee's age on the last day of the tax year. For 2026:

Source: IRS Publication 15-B (2026), Table 2-2, with matching figures in Treasury Regulation 1.79-3. Table I is set in the regulation, but check the current Publication 15-B when you run year-end payroll.

How to calculate it

1. Take the total coverage on the employee and subtract $50,000.
2. Divide the excess by $1,000, rounding to the nearest tenth.
3. Multiply by the rate for the employee's attained age on December 31.
4. Multiply by the number of months of coverage in the year. Coverage shorter than a month is prorated.
5. Subtract what the employee paid toward the coverage, with after-tax dollars. Regulation 1.79-3 says all such employee payments for the year count, even for months in which no excess coverage existed, but payments for insurance that falls under the statutory exceptions do not.
6. The result is the imputed income for the year.

If the death benefit changes during the period, the regulation uses the average of the benefit at the start and end of the period. Benefits paid in installments are valued at present value under the insurer's mortality table.

Hypothetical example

Say a 52-year-old employee has $150,000 of employer-paid group-term life for all 12 months of 2026, and pays nothing. The excess is $100,000, or 100 thousands. At the age 50 to 54 rate of $0.23, the monthly cost is 100 x $0.23 = $23. Over 12 months that is $276 of imputed income. The employer adds $276 to wages for Social Security and Medicare, reports it on the W-2, and does not withhold federal income tax on it. If the employee had paid $100 after tax toward the coverage, the imputed income would be $176. The numbers are an illustration, not typical coverage.

Who is covered and the special tests

Employees. The rule applies to current employees. Former employees have their own treatment: Publication 15-B includes a subsection on former employees, and the employer reports uncollected tax separately. Retirees' coverage continues to be taxed at the Table I rate.

Dependent coverage. Publication 15-B says dependent coverage can be excluded as a de minimis fringe if the face amount is $2,000 or less. Larger amounts are taxable to the employee under different rules.

S corporation owners. Publication 15-B has a subsection on S corporation shareholders. A more-than-2% shareholder is generally treated like a partner for fringe benefit purposes, so consult the adviser about how group-term life is reported for owners.

The 10-employee rule and discrimination tests. Publication 15-B has subsections on the 10-employee rule and on an exception for key employees. In outline, the exclusion generally requires a plan covering a minimum number of employees, subject to exceptions, and a plan that favors key employees can lose the $50,000 exclusion for them. For 2026, Publication 15-B defines a key employee as an officer with pay above $235,000, a 5% owner, or a 1% owner with pay above $150,000. If a plan is discriminatory, the key employees lose the exclusion and are taxed on the full cost of their coverage. Rules on classes of employees, eligibility and benefit formulas are detailed, so confirm the plan design with your carrier and a tax adviser.

Payroll and reporting steps

• Ask the carrier or benefits platform for coverage amounts by employee.
• Calculate the imputed income monthly if possible, so Social Security and Medicare withholding is spread over the year rather than hitting in December.
• Add the amount to Social Security and Medicare wages, but not to federal income tax withholding wages unless you choose to withhold.
• Report it on Form W-2 in boxes 1, 3 and 5 and in box 12 with code C, per Publication 15-B.
• Where state law treats group-term life differently, apply the state rule. Some states follow federal treatment, others do not. Use the state tax agency's guidance.
• Keep the employee contribution records.

When the plan is paired with other benefits

Group life is often bundled with disability and accidental death coverage. Only the life coverage is subject to Section 79. The employee-paid share, if made through a cafeteria plan, may be pre-tax, in which case it is an employer contribution for Section 79 purposes rather than an employee after-tax payment. See Section 125 cafeteria plans: premium-only plans, FSAs and 2026 limits. The general design of the offering is in group life insurance for employees: how it works and what it costs you, and the broader package in building an employee benefits package that fits your budget. Executive-only life benefits are in section 162 executive bonus plans: how they work and how they are taxed.

Voluntary and supplemental coverage

Employee-paid supplemental life offered through a voluntary benefits: what they are and how they work program counts toward the total coverage amount if it is part of the same group-term plan, and the employee's after-tax premiums reduce the imputed amount. Group life is a welfare benefit, so ERISA basics for small employers: what the law requires of your benefit plans explains plan document and reporting duties, and group short- and long-term disability insurance for employers covers the sibling product often sold in the same package. The carrier's underwriting terms (guaranteed issue limits, evidence of insurability above them) affect how much coverage each employee can actually hold, so payroll should get coverage amounts from the carrier each year.

Key takeaways

• Employer-paid group-term life over $50,000 creates imputed income, calculated from Table I rather than actual premium.
• The 2026 Table I rates run from $0.05 per $1,000 per month under age 25 to $2.06 at age 70 and older.
• The amount is subject to Social Security and Medicare tax, not federal income tax withholding or FUTA, and goes on the W-2 with code C.
• After-tax employee contributions reduce the imputed amount.
• Discrimination in favor of key employees can cost them the $50,000 exclusion.