April 1, 2025
Paul Van Brunt, Associate Director of Compliance
Group term life insurance (“GTLI”) is a popular employee benefit that provides financial protection to employees’ families in the event of their death. While such coverage has its advantages (such as aiding in the hiring and retention of qualified employees), the administration of GTLI plans can pose significant challenges for the novice employer plan sponsor. Understanding the nuisances of these challenges is important for plan management and for ensuring that employees receive all of the benefits of their plan participation.
Employer Action Items
- Accurate Record-Keeping. Maintain accurate records of employee enrollments, beneficiary designations, and coverage amounts. Employers should implement systems to monitor and update this information regularly.
- Review Imputed Income Requirements. When an employer provides life insurance coverage that exceeds $50,000, the value of the coverage above the $50,000 threshold is deemed as “imputed income” by the Internal Revenue Service (“IRS”), and as such, must be included and reported as part of an employee’s taxable wages. Also, imputed income is subject to Social Security and Medicare taxes, and it may be subject to federal income tax withholding (at the employer’s discretion).
- Non-discrimination Testing. Employer-provided GTLI is subject to nondiscrimination requirements under Section 79 of the Internal Revenue Code (“IRC”). Section 79 allows for the value of up to $50,000 of GTLI coverage on an employee’s life to be excluded from the employee’s gross income. However, certain nondiscrimination requirements must be satisfied in order for all employees to benefit from the $50,000 coverage tax exclusion. The nondiscrimination rules provide that employer-provided GTLI plans cannot discriminate in favor of certain “key employees” with respect to eligibility to participate in the plan or contributions or benefits under the plan. A key employee is defined as an officer with annual compensation in excess of the specified threshold ($215,000 for 2024; $230,000 for 2025), a more-than-5% owner/shareholder, or a more-than-1% owner with compensation in excess of $150,000. Part-time or seasonal employees, full-time employees with fewer than three years of service, and certain employees covered by a collectively bargained agreement may be excluded from testing. Former employees (e.g., retirees) are tested separately from active employees.
- Promote Regular Beneficiary Reviews. Encourage employees to review and update their beneficiary designations annually or after the occurrence of qualifying significant life events. Send regular reminders to employees and provide them with easy access to beneficiary designation forms, where necessary.
- Communication with Employees. Communicate clearly with employees regarding their coverage options, available benefits, and detailing any plan-level modifications. Employers should provide comprehensive information at the time of hire or first enrollment eligibility, and thereafter, during each open enrollment period.
- Handling Claims. Processing claims and ensuring timely payouts to beneficiaries is a critical function of the plan’s administration. Employers should consider establishing policies and procedures governing claim submission, substantiation, processing, and payout.
Summary
Administering group term life insurance plans effectively requires proactive planning and ongoing attention. By addressing common challenges and implementing recommended action items, employers may ensure smooth plan operations, minimize administrative errors, and maximize the value of the employer’s GTLI offering.
Determining which employees are eligible for coverage, especially considering those workers with varying employment statuses (full-time, part-time, contract), can be challenging. Managing enrollment periods (particularly during onboarding and open enrollment periods) and collecting accurate data may be challenging for employers. For instance, tracking changes in employee status (e.g., from part-time to full-time) and automatically adjusting plan eligibility and benefit outcomes can be a manual and tedious process.
Many employees often forget to update beneficiary designations after the occurrence of certain qualifying life events, such as marriage, divorce, or the birth of a child. This can lead to disputes and delays in claims processing and payment. It’s important that employees understand the significance of regularly reviewing and updating their beneficiary information.
Enrolling in coverage that’s more than the guaranteed amount is another challenge for employees and employers as it requires certain specifics in the underwriting process. Additional information from employees is required by the issuers in the way of Evidence of Insurability forms that seek to obtain declarations relative to the employee’s medical history and their family’s medical history, as well.
IRC Section 79 requires that the employer not discriminate in favor of highly compensated or “key” employees. Essentially, this means that the type of coverage and amount of benefits obtainable across the plan are offered on the same basis to both highly compensated and key employees, as such coverage is offered to non-highly compensated and non-key employees. Practically, this means coverage should be a set amount for all employees, or coverage for all employees must be based upon the same factor of salary (i.e., two times annual salary) for all employees. There are two tests required for nondiscrimination assuredness: (a) the eligibility test ensures the GTLI is offered to all eligible classifications of employees; and (b) the benefit test evaluates the level of benefits across the participation demographic.
GTLI can also have tax consequences if the value of the benefit obtainable is greater than $50,000. For example, if a 45-year-old employee has $200,000 worth of GTLI benefits available, the employer must calculate and assess imputed income in an amount equal to the value of the difference in benefit (e.g., $200,000 – $50,000 = $150,000 of benefit deemed imputed income). In this case, the employee will have $2,700 of reportable compensation added to their wages ($0.15 x $150,000 x 12 months of coverage = $2,700). Remember to speak with tax professionals regarding the assessment and reporting of imputed income arising in the GTLI context where the coverage offered is more than the $50K exemption threshold, as the difference must be included in the employee’s income and be made subject to Social Security and Medicare taxes.
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