Hello, we offer life insurance as a benefit. the plan is not group term life insurance policy. The business is located in NJ.
Please advise as to the taxabilty of the benefit- both for State and Federal.
Agree with David, The general valuation rule is that taxable fringe benefits are valued at their fair market value - meaning the amount it would cost the employee to obtain the benefit from a third party (which is not necessarily the employer's actual cost or what the employee thinks the benefit is worth). However, Life insurance that does not qualify as group term life insurance is discussed in Reg 26 CFR 1.61-2(d)(ii)(A).The reg discusses several types of policies, including policies covered by special rules we won't get into here such as policies incidental to qualified plan or annuity contracts and split-dollar policies, but the general rule is that the cost of the policy to the employer is included in the employee's gross income. No mention of fair market value, but the actual cost to the employer.
In the words of the regulation,"Generally, life insurance premiums paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of such employee are part of the gross income of the employee." On that basis, it should not matter whether the policy is a term policy or a whole live policy, or an accidental death (flight insurance) policy, The employee has effectively paid the premiums with after tax dollars so the death benefits and savings belong to the employee. In addition, any dividends paid to the employee are not taxable income to the employee. The dividends are a return of excess premium charges by mutual insurance companies and are not taxable as they are in the nature of a return of principal rather than income to the employee.
Employer paid premiums on qualified group term life insurance do not create an issue regarding death benefits because the cost of employer provided GTL is included in the employee's gross income to the extent the premiums exceed the premiums on $50,000 of the insurance plus any amounts paid by the employee. That is, the employee is paying for the taxable value of the insurance premiums either with after tax dollars or by paying tax on any excess premiums.