An employee receives $200,000 of EMPLOYER-PAID group term life insurance through a non-discriminatory cafeteria plan. Under IRC §79, the income-tax treatment is:

Explanation

Under IRC §79, the cost of EMPLOYER-PROVIDED group term life insurance is excluded from the employee's gross income only up to the FIRST $50,000 of coverage, which is what the response applying the $50,000 exclusion and imputing the excess at Uniform Premium Table I rates describes. For coverage in excess of $50,000, the IRS calculates the cost using Uniform Premium Table I (an age-based monthly rate per $1,000 of excess coverage), reduces it by any after-tax employee contributions, and adds the net amount to the employee's W-2 wages as IMPUTED INCOME (subject to income tax and FICA but generally not federal unemployment tax). For a $200,000 policy, $150,000 of excess coverage generates imputed income each year based on the employee's age. The response imputing the entire $200,000 face amount overstates by taxing the face amount itself rather than the cost of the coverage. The response making all employer-paid group term coverage tax-free regardless of face amount ignores the $50,000 cap. The response excluding the first $200,000 and imputing only coverage above that is reversed. This is one of the most frequently tested taxation rules.