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Example:
Tom's employer provides him with group-term life insurance coverage of $200,000. Tom is 45 years old, is not a key employee, and pays $100 per year toward the cost of the insurance. Tom's employer must include $170 in his wages. The $200,000 of insurance coverage is reduced by $50,000. The total cost of $150,000 of coverage is $270 ($.15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code C.
Coverage for dependents. Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. The part of this coverage that the employee paid on an after-tax basis is also excludable from income. For this purpose, the cost is figured using the monthly cost table above.
Former employees. For group-term life insurance over $50,000 provided to former employees (including retirees), the former employees must pay the employee's share of social security and Medicare taxes with their federal income tax returns. You are not required to collect those taxes. Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. Report those uncollected amounts separately in box 12 on Form W-2 using codes “M” and “N.” See the Instructions for Forms W-2 and W-3.
Exception for key employees. Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. (This exception generally does not apply to church plans.) When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee.
For this purpose, the cost of the insurance is the greater of the following amounts.
· The premiums you pay for the employee's insurance. See Regulations section 1.79-4T (Q-6) for more information.
· The cost you figure using the Table 2-2.
For this exclusion, a key employee during 2007 is an employee or former employee who is one of the following individuals. See section 416(i) of the Internal Revenue Code for more information.
· An officer having annual pay of more than $145,000.
· An individual who for 2007 was either of the following.
· A 5% owner of your business.
· A 1% owner of your business whose annual pay was more than $150,000.
· A former employee who was a key employee upon retirement or separation from service is also a key employee.
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