California Life and Health Insurance Practice Exam

How is the cost of employer-provided group life insurance with coverage amounts above $50,000 treated for tax purposes?

1. Tax-free income to the employee

2. Taxable income to the employee

3. Tax deductible for the employer

4. No tax implications

The correct answer is: Taxable income to the employee

Employer-provided group life insurance with coverage amounts exceeding $50,000 is treated as taxable income to the employee. Specifically, the IRS considers the cost of coverage that exceeds this threshold as imputed income, meaning that the value of the coverage must be reported by the employee as income. This is based on the idea that while the first $50,000 of coverage is provided tax-free, any amount beyond that is seen as a fringe benefit, and thus, it is subjected to taxation. The taxable amount is calculated based on the IRS table that establishes the value of the coverage for various age groups, which adds an additional layer of complexity. The correct treatment reflects a broader principle in tax law regarding fringe benefits, ensuring that substantial benefits provided by an employer in the form of insurance coverage are recognized for taxation to maintain equity across different income levels among employees.