Group Health Insurance and Federal Tax Considerations
Group underwriting
Group coverage underwrites the group, not the individual. Key requirements: a group formed for a reason other than buying insurance, eligibility rules (full-time, actively at work), a minimum participation percentage (often 75% of eligible employees in a contributory plan; 100% in some noncontributory plans), and no individual evidence of insurability during open enrollment. Group life is usually term with a schedule of benefits, plus conversion and portability rights. Contributory plans require employee premium share; noncontributory plans are employer-paid.
Federal tax rules to memorize
- Death benefits paid to a beneficiary are generally income-tax-free (but included in the insured's estate if the insured held incidents of ownership).
- Cash value growth is tax-deferred; loans are not taxed unless the policy lapses; dividends are tax-free to the extent they do not exceed premiums paid.
- Employer-paid premiums for up to $50,000 of group term life are tax-free; the value of coverage above $50,000 is imputed income using IRS Table I rates (Section 79).
- Employer contributions to Section 125 cafeteria plans and HSAs are excluded from income.
- Employer-paid medical premiums are deductible to the business and excluded from employee income.
Worked example: An employee has $150,000 of group term life. $100,000 is excess coverage; multiply that by the Table I rate for the employee's age band, then by 12 months, to find the taxable imputed income reported on the W-2.
Regulatory overlay
COBRA requires continuation (18 months for termination, up to 36 for dependents) for groups of 20+; ERISA sets fiduciary and reporting standards.