Section 79 Group-Term Life Insurance: Imputed Income and W-2 Reporting

Under Section 79 of the Internal Revenue Code, employer-provided group-term life insurance is tax-free on the first $50,000 of coverage per employee. Anything above that becomes “imputed income” — a taxable wage figure calculated from an IRS age-based rate table rather than from the premium the employer actually pays. Employers deduct the premiums as an ordinary compensation expense.¹² Several rules can strip the exclusion away, so it is worth knowing which policies qualify, how the math works, and who gets locked out.

What Counts as Group-Term Life Insurance

Not every employer-paid life policy qualifies. The coverage must provide a death benefit only, with no cash value or other permanent feature. It must cover a group of employees rather than named individuals. And the amount of coverage each person receives must follow a formula that prevents cherry-picking, such as a multiple of salary, years of service, or job classification.

Policies that combine term coverage with a permanent component have to be split. Only the term piece qualifies for the $50,000 exclusion; the permanent piece is taxable regardless of amount.³

Calculating Imputed Income on Coverage Over $50,000

If total coverage is $50,000 or less, there is nothing to report. Once it exceeds that threshold, the cost of the excess is added to the employee’s taxable wages. That cost does not come from the employer’s actual premium. It comes from a uniform premium table in Treasury Regulation 1.79-3, commonly called Table I.⁴

Table I Monthly Rates per $1,000 of Coverage

Age is determined as of the last day of the tax year.

Under 25: $0.05
25–29: $0.06
30–34: $0.08
35–39: $0.09
40–44: $0.10
45–49: $0.15
50–54: $0.23
55–59: $0.43
60–64: $0.66
65–69: $1.27
70 and older: $2.06

These rates are almost always lower than what the employer actually pays, which is part of what makes the benefit efficient. They also climb steeply after age 50, so the same coverage amount produces very different tax bills at different ages.³

A Worked Example

Suppose an employee is 47 and has $150,000 of coverage.

Excess coverage: $150,000 − $50,000 = $100,000.
Table I rate for age 45–49: $0.15 per $1,000 per month.
Monthly cost: 100 × $0.15 = $15.00. Annual imputed income: $180.

The same $150,000 policy on a 62-year-old runs the rate up to $0.66 and produces $792 of imputed income for the year.

Employee Contributions

Anything the employee pays toward the premium reduces imputed income dollar for dollar. If the 47-year-old above contributed $80 during the year, the reported imputed income drops from $180 to $100. One wrinkle applies to bundled policies: employee contributions are applied first against the cost of any permanent portion, and only the excess can reduce the term-coverage imputed income.

Who Is Locked Out of the $50,000 Exclusion

Some people who look like employees for other purposes cannot use the Section 79 exclusion at all. When that happens, the full cost of the coverage is taxable to them.

Anyone who owns 2% or more of an S corporation is not treated as an employee for Section 79 purposes. Premiums the S corp pays on that shareholder’s group-term coverage are added to W-2 wages and fully taxable. Partners in a partnership and sole proprietors are also outside the definition of employee under Section 79, so group-term coverage on their lives does not qualify for the exclusion either.

Section 79(b) works in the other direction for a few situations, letting coverage above $50,000 escape imputed income entirely:⁵⁶

Coverage continued for a former employee who left because of a disability, as defined under Section 72(m)(7).
Policies where the employer is the beneficiary (a key-person arrangement) or where a Section 170(c) charity is the sole beneficiary for the whole tax year.
Certain employer-owned contracts already covered by Section 72(m)(3), to avoid double counting.

Nondiscrimination Rules for Key Employees

Section 79 has its own nondiscrimination rules aimed at preventing the plan from becoming a tax shelter for the executive suite. The penalty for failure falls on the key employees, not on rank-and-file workers.

The statute uses “key employee” as defined in Section 416(i), not the “highly compensated employee” concept from retirement testing. A key employee is generally an officer with compensation above an indexed threshold, a 5% or greater owner, or a 1% or greater owner with compensation above $150,000.⁵

A plan is nondiscriminatory if it passes both a participation test and a benefits test. The participation test is met by any one of these: the plan benefits at least 70% of all employees; at least 85% of participating employees are not key employees; or the plan benefits a class of employees set up by the employer that does not favor key employees. The benefits test requires that every benefit offered to a participating key employee be available to all other participants. Tying coverage to salary is still allowed as long as the formula runs uniformly.³

When a plan fails, key employees lose the $50,000 exclusion entirely. Their taxable amount becomes the greater of the actual employer premium cost or the Table I cost, so a negotiated low group rate cannot rescue them. Non-key employees in the same plan keep their exclusion.

Spouse and Dependent Coverage

Coverage on an employee’s spouse or dependents follows a different rule. If the face amount is $2,000 or less, the cost is excluded as a de minimis fringe benefit. Once it exceeds $2,000, the entire cost becomes taxable to the employee, and imputed income is calculated using Table I based on the age of the spouse or dependent, not the employee’s age. The $50,000 exclusion does not apply to dependent coverage at all.⁷⁸

Retirees and Former Employees

When coverage continues after employment ends, the $50,000 exclusion is still available and imputed income is calculated the same way using the former employee’s age.³

The practical difference is payroll tax collection. Because a retiree is off the payroll, the employer typically cannot withhold the employee share of Social Security and Medicare on the imputed income. Those amounts get reported on the W-2 with Code M (uncollected Social Security tax) and Code N (uncollected Medicare tax) in Box 12, and the former employee pays them when filing an individual return. The employer still owes its own share.⁹

How Employers Report It on Form W-2

Imputed income from group-term life insurance flows through several W-2 boxes:

Box 1 (Wages): includes the imputed income.
Boxes 3 and 5 (Social Security and Medicare wages): also include the imputed income, since FICA applies.
Box 12, Code C: reports the taxable cost of coverage over $50,000 as its own line item.

Federal income tax withholding on the imputed income is not required; the employee settles that liability on the individual return. W-2s are due January 31 of the year following the coverage year.¹⁰⁹

ERISA and Form 5500

A group-term life insurance plan is a welfare benefit plan under ERISA, so administrative obligations sit alongside the tax rules. A fully insured plan (or an unfunded one paid from general assets) with fewer than 100 participants at the start of the plan year is generally exempt from Form 5500 filing, which covers most small and mid-sized employer plans. Plans that hit 100 participants, hold assets in a trust, or take employee contributions outside a qualifying cafeteria plan must file. Only current employees enrolled in the plan and former employees receiving or eligible for COBRA count toward the 100-participant threshold; spouses and dependents do not. Government and church plans are generally exempt from ERISA filing altogether.¹¹

1
Office of the Law Revision Counsel. 26 U.S. Code 79 – Group-Term Life Insurance Purchased for Employees
2
Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
3
Internal Revenue Service. Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits
4
eCFR. 26 CFR 1.79-3 – Determination of Amount Equal to Cost of Group-Term Life Insurance Protection
5
Office of the Law Revision Counsel. 26 USC 79 – Group-Term Life Insurance Purchased for Employees
6
eCFR. 26 CFR 1.79-2 – Exceptions to the Rule of Inclusion
7
Internal Revenue Service. Group-Term Life Insurance
8
Office of the Law Revision Counsel. 26 U.S. Code 132 – Certain Fringe Benefits
9
Internal Revenue Service. Group Term Life Insurance
10
Social Security Administration. Deadline Dates to File W-2s
11
U.S. Department of Labor. Instructions for Form 5500