Employer Deduction of Life Insurance Premiums: What's Allowed and What Isn't

Can an employer deduct life insurance premiums?

Employers can deduct the cost of group-term life insurance premiums for employees up to $50,000 of coverage; any amount above that is a taxable benefit to the employee and is not deductible as a business expense.

Tax treatment of group-term life insurance

Under Internal Revenue Code Section 79, premiums paid for a qualified group-term policy are fully deductible by the employer as a business expense, provided the coverage does not exceed $50,000 per employee. The value of coverage beyond $50,000 is calculated using IRS Table I rates and reported as imputed income on the employee's W‑2.

When premiums are not deductible

If the policy is a permanent life insurance contract (whole life, universal life, etc.) or if the employer pays for supplemental coverage that is not a qualified group-term plan, the premiums are generally not deductible. The cost is treated as a non‑business expense and the employee may receive a taxable fringe benefit.

Employer‑paid premiums for non‑employees

Payments made for spouses, dependents, or retirees are also subject to the $50,000 limit. Any excess coverage is taxable to the recipient and does not qualify for a deduction by the employer.

Reporting requirements

Employers must include the imputed income for excess coverage on Form W‑2, Box 12, using code C. The amount is added to the employee's wages for income‑tax and payroll‑tax purposes, but the employer can still deduct the portion of premiums that covers the first $50,000.

Key takeaways

• Deductible only for qualified group‑term policies up to $50,000 per employee.
• Premiums for permanent policies or supplemental coverage are not deductible.
• Excess coverage is taxable to the employee and must be reported on the W‑2.
• Employers must follow IRS Table I to calculate imputed income.