Accident and Health Plans

September 21, 2023

IRS Publication 15-B - Accident
and Health Benefits
Accident and Health Benefits

This exclusion applies to contributions you make to an accident or health plan

for an employee, including the following.
● Contributions to the cost of accident or health insurance including
qualified long-term care insurance.
● Contributions to a separate trust or fund that directly or through insurance
provides accident or health benefits.
● Contributions to Archer MSAs or HSAs (discussed in Pub. 969).
● This exclusion also applies to payments you directly or indirectly make to
an employee under an accident or health plan for employees that are either
of the following.
○ Payments or reimbursements of medical expenses.
○ Payments for specific permanent injuries (such as the loss of the use
of an arm or leg). The payments must be figured without regard to the
period the employee is absent from work.
Accident and Health Benefits

Accident or health plan.

● This is an arrangement that provides benefits for your employees, their
spouses, their dependents, and their children (under age 27 at the end of
the tax year) in the event of personal injury or sickness.
● The plan may be insured or noninsured and doesn't need to be in writing.
Accident and Health Benefits

Exclusion from wages. You can generally exclude the value of accident or
health benefits you provide to an employee from the employee's wages.

Exception for highly compensated employees. If your plan is a self-insured

medical reimbursement plan that favors highly compensated employees, you
must include all or part of the amounts you pay to these employees in box 1 of
Form W-2. However, you can exclude these amounts (other than payments for
specific injuries or illnesses not made under a plan set up to benefit all
employees or certain groups of employees) from the employee's wages subject
to income tax withholding and social security, Medicare, and FUTA taxes.
Accident and Health Benefits

A self-insured plan is a plan that reimburses your employees for medical

expenses not covered by an accident or health insurance policy.

A highly compensated employee for this exception is any of the following

individuals.
● One of the five highest paid officers.
● An employee who owns (directly or indirectly) more than 10% in value of
the employer's stock.
● An employee who is among the highest paid 25% of all employees (other
than those who can be excluded from the plan).

Code Section 105(h)

Accident and Health Benefits

COBRA premiums.
● The exclusion for accident and health benefits applies to amounts you pay
to maintain medical coverage for a current or former employee under the
Combined Omnibus Budget Reconciliation Act of 1986 (COBRA).
● The exclusion applies regardless of the length of employment, whether you
directly pay the premiums or reimburse the former employee for premiums
paid, and whether the employee's separation is permanent or temporary.
Exclusion for Employer Provided
Health Benefits - Code Sections
104, 105, and 106
General Background

In general, there is a broad exclusion from gross income for employer-provided

health benefits, including insurance premiums and other employer
contributions to provide coverage, as well as the payment or reimbursement of
medical expenses not covered by insurance and contributions to certain
health-related accounts.

The exclusion applies with respect to health benefits provided to a current or

former employee, including a retiree, and an employee’s family members
General Background

Amounts paid by an employee for health benefits, such as an employee’s share

of premiums for health insurance, are not considered employer-provided
benefits eligible for the exclusion. However, under the cafeteria plan rules, an
employee may elect to have amounts withheld from the employee’s
compensation for medical expenses, and those amounts are treated as
provided by the employer for purposes of the exclusion.

Employer-provided health benefits are also excluded from wages for purposes
of taxes under the Federal Insurance Contributions Act (“FICA”), the Railroad
Retirement Tax Act (“RRTA”), and the Federal Unemployment Tax Act (“FUTA”).
Code Section 106

Contributions by employer to accident and health plans

Code Section 106(a). General rule.Except as otherwise provided in this section,

gross income of an employee does not include employer-provided coverage
under an accident or health plan.
Code Section 105

Amounts received under accident and health plans

(a) Amounts attributable to employer contributions. Except as otherwise

provided in this section, amounts received by an employee through
accident or health insurance for personal injuries or sickness shall be
included in gross income to the extent such amounts (1) are attributable to
contributions by the employer which were not includible in the gross
income of the employee, or (2) are paid by the employer.
Code Section 105

Amounts received under accident and health plans

(b) Amounts expended for medical care. Except in the case of amounts
attributable to (and not in excess of) deductions allowed under section
213 (relating to medical, etc., expenses) for any prior taxable year, gross
income does not include amounts referred to in subsection (a) if such
amounts are paid, directly or indirectly, to the taxpayer to reimburse the
taxpayer for expenses incurred by him for the medical care (as defined in
section 213(d)) of the taxpayer, his spouse, his dependents (as defined in
section 152, determined without regard to subsections (b)(1), (b)(2), and
(d)(1)(B) thereof), and any child (as defined in section 152(f)(1)) of the
taxpayer who as of the end of the taxable year has not attained age 27.
Code Section 213

(a) Allowance of deduction. There shall be allowed as a deduction the

expenses paid during the taxable year, not compensated for by insurance
or otherwise, for medical care of the taxpayer, his spouse, or a dependent
(as defined in section 152, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses
exceed 7.5 percent of adjusted gross income.
Code Section 213

(d) Definitions. For purposes of this section—

(1)The term “medical care” means amounts paid—
(A) for the diagnosis, cure, mitigation, treatment, or prevention of
disease, or for the purpose of affecting any structure or function of the
body,
…
Code Section 104

Compensation for injuries or sickness

Code Section 104(a)(3). In general. Except in the case of amounts attributable

to (and not in excess of) deductions allowed under section 213 (relating to
medical, etc., expenses) for any prior taxable year, gross income does not
include … amounts received through accident or health insurance (or through
an arrangement having the effect of accident or health insurance) for personal
injuries or sickness (other than amounts received by an employee, to the extent
such amounts (A) are attributable to contributions by the employer which were
not includible in the gross income of the employee, or (B) are paid by the
employer)...
Reg. Section 1.106-1

Reg. § 1.106-1 Contributions by employer to accident and health plans.

(a) The gross income of an employee does not include the contributions that
the employer makes to an accident or health plan for compensation (through
insurance or otherwise) to the employee for personal injuries or sickness
incurred by the employee, the employee's spouse, the employee's dependents
(as defined in section 152 determined without regard to section 152(b)(1),
(b)(2), or (d)(1)(B)), or any child (as defined in section 152(f)(1)) of the
employee who as of the end of the taxable year has not attained age 27.
Reg. Section 1.106-1

The employer may contribute to an accident or health plan either [1] by paying
the premium (or a portion of the premium) on a policy of accident or health
insurance covering one or more of his employees, or [2] by contributing to a
separate trust or fund (including a fund referred to in section 105(e)) which
provides accident or health benefits directly or through insurance to one or
more of his employees. However, if such insurance policy, trust, or fund
provides other benefits in addition to accident or health benefits, section 106
applies only to the portion of the employer's contribution which is allocable to
accident or health benefits. See paragraph (d) of § 1.104–1 and §§ 1.105–1
through 1.105–5, inclusive, for regulations relating to exclusion from an
employee's gross income of amounts received through accident or health
insurance and through accident or health plans.
Reg. Section 1.105-5

§ 1.105-5 Accident and health plans.

(a) In general. Sections 104(a)(3) and 105 (b), (c), and (d) exclude from gross
income certain amounts received through accident or health insurance.
Section 105(e) provides that for purposes of sections 104 and 105 amounts
received through an accident or health plan for employees, and amounts
received from a sickness and disability fund for employees maintained under
the law of a State, a Territory, or the District of Columbia, shall be treated as
amounts received through accident or health insurance. In general, an accident
or health plan is an arrangement for the payment of amounts to employees in
the event of personal injuries or sickness.
Reg. Section 1.105-5

§ 1.105-5 Accident and health plans.

(a) In general. Sections 104(a)(3) and 105 (b), (c), and (d) exclude from gross
income certain amounts received through accident or health insurance.
Section 105(e) provides that for purposes of sections 104 and 105 amounts
received through an accident or health plan for employees, and amounts
received from a sickness and disability fund for employees maintained under
the law of a State, a Territory, or the District of Columbia, shall be treated as
amounts received through accident or health insurance. In general, an accident
or health plan is an arrangement for the payment of amounts to employees in
the event of personal injuries or sickness.
Reg. Section 1.105-5

§ 1.105-5 Accident and health plans.

(a) In general.

… An accident or health plan may be either insured or noninsured, and it is not

necessary that the plan be in writing or that the employee's rights to benefits
under the plan be enforceable.

… It is immaterial who makes payment of the benefits provided by the plan. For
example, payment may be made by the employer, a welfare fund, a State
sickness or disability benefits fund, an association of employers or employees,
or by an insurance company.
Reg. Section 1.105-1

§ 1.105-1 Amounts attributable to employer contributions.

(a) In general. Under section 105(a), amounts received by an employee through

accident or health insurance for personal injuries or sickness must be included
in his gross income to the extent that such amounts (1) are attributable to
contributions of the employer which were not includible in the gross income of
the employee, or (2) are paid by the employer, unless such amounts are
excluded therefrom under section 105(b), (c), or (d).
Reg. Section 1.105-1

§ 1.105-1 Amounts attributable to employer contributions.

(a) In general.

…For purposes of this section, the term “amounts received by an employee

through an accident or health plan” refers to any amounts received through
accident or health insurance, and also to any amounts which, under section
105(e), are treated as being so received. See § 1.105–5. In determining the
extent to which amounts received for personal injuries or sickness by an
employee through an accident or health plan are subject to the provisions of
section 105(a), rather than section 104(a)(3), the provisions of paragraphs (b),
(c), (d), and (e) of this section shall apply.
Reg. Section 1.104-1

Reg. Section 1.104-1(d) Accident or health insurance. Section 104(a)(3)

excludes from gross income amounts received through accident or health
insurance for personal injuries or sickness (other than amounts received by an
employee, to the extent that such amounts (1) are attributable to contributions
of the employer which were not includible in the gross income of the employee,
or (2) are paid by the employer). … If, therefore, an individual purchases a policy
accident or health insurance out of his own funds, amounts received
thereunder for personal injuries or sickness are excludable from his gross
income under section 104(a)(3). …
Reg. Section 1.104-1

…Conversely, if an employer is either the sole contributor to such a fund, or is

the sole purchaser of a policy of accident or health insurance for his employees
(on either a group or individual basis), the exclusion provided under section
104(a)(3) does not apply to any amounts received by his employees through
such fund or insurance.

…If the employer and his employees contribute to a fund or purchase insurance
which pays accident or health benefits to employees, section 104(a)(3) does
not apply to amounts received thereunder by employees to the extent that such
amounts are attributable to the employer's contributions. See § 1.105–1 for
rules relating to the determination of the amount attributable to employer
contributions. …
RECAP

An arrangement under which an employer provides health benefits to

employees is commonly called an “accident or health plan,” defined generally
under Treas. Reg. sec. 1.105-5(a) as an arrangement for the payments of
amounts to employees in the event of personal injuries or sickness.

This concept is thus broader than a plan that provides health benefits, for
example, it includes a plan that provides disability benefits.
Cafeteria Plan, including Flexible
Spending Arrangement - Code
Section 125
Code Section 125

(a) General rule

Except as provided in subsection (b), no amount shall be included in the gross
income of a participant in a cafeteria plan solely because, under the plan, the
participant may choose among the benefits of the plan.

(b) Exception for highly compensated participants and key employees

(1) Highly compensated participants. In the case of a highly compensated
participant, subsection (a) shall not apply to any benefit attributable to
a plan year for which the plan discriminates in favor of—
(A) highly compensated individuals as to eligibility to participate, or
(B) highly compensated participants as to contributions and benefits.
Code Section 125

(d) Cafeteria plan defined. For purposes of this section—

(1) In general. The term “cafeteria plan” means a written plan under
which—
(A) all participants are employees, and
(B) the participants may choose among 2 or more benefits consisting
of cash and qualified benefits.
Code Section 125

(i) Limitation on health flexible spending arrangements

(1) In general. For purposes of this section, if a benefit is provided under a
cafeteria plan through employer contributions to a health flexible spending
arrangement, such benefit shall not be treated as a qualified benefit unless
the cafeteria plan provides that an employee may not elect for any taxable
year to have salary reduction contributions in excess of $2,500 made to
such arrangement.

2023 limit = $3,050

Flexible Spending Arrangement

Flexible Spending Arrangements (FSAs)

A health Flexible Spending Arrangement (FSA) allows employees to be
reimbursed for medical expenses. FSAs are usually funded through voluntary
salary reduction agreements with your employer. No employment or federal
income taxes are deducted from your contribution. The employer may also
contribute.
Flexible Spending Arrangement

What are the benefits of an FSA? You may enjoy several benefits from having an
FSA.
● Contributions made by your employer can be excluded from your gross
income.
● No employment or federal income taxes are deducted from the
contributions.
● Reimbursements may be tax free if you pay qualified medical expenses.
See Qualified medical expenses, later.
● You can use an FSA to pay qualified medical expenses even if you haven’t
yet placed the funds in the account.
Flexible Spending Arrangement

Contributions to an FSA
You contribute to your FSA by electing an amount to be voluntarily withheld
from your pay by your employer. This is sometimes called a “salary reduction
agreement.” The employer may also contribute to your FSA if specified in the
plan.

You don’t pay federal income tax or employment taxes on the salary you
contribute or the amounts your employer contributes to the FSA. However,
contributions made by your employer to provide coverage for long-term care
insurance must be included in income
Flexible Spending Arrangement

Amount of Contribution
For 2023, salary reduction contributions to a health FSA can’t be more than
$3,050 a year (or any lower amount set by the plan). This amount is indexed for
inflation and may change from year to year.

Generally, contributed amounts that aren’t spent by the end of the plan year are
forfeited. However, there are possible exceptions. For this reason, it is
important to base your contribution on an estimate of the qualifying expenses
you will have during the year.
Flexible Spending Arrangement

Distributions From an FSA

Generally, distributions from a health FSA must be paid only to reimburse you
for qualified medical expenses you incurred during the period of coverage. You
must be able to receive the maximum amount of reimbursement (the amount
you have elected to contribute for the year) at any time during the coverage
period, regardless of the amount you have actually contributed. The maximum
amount you can receive tax free is the total amount you elected to contribute to
the health FSA for the year.
Flexible Spending Arrangement

Qualified medical expenses. Qualified medical expenses are those specified in

the plan that would generally qualify for the medical and dental expenses
deduction. These are explained in Pub. 502.

Expenses incurred after December 31, 2019, for over-the-counter medicine

(whether or not prescribed) and menstrual care products are considered
medical care and are considered a covered expense.
Flexible Spending Arrangement

Balance in an FSA
FSAs are generally "use-it-or-lose-it" plans. This means that amounts in the
account at the end of the plan year can't generally be carried over to the next
year. However, the plan can provide for either a grace period or a carry-over.
The plan can provide for a grace period of up to 2 1/2 months after the end of
the plan year. If there is a grace period, any qualified medical expenses incurred
in that period can be paid from any amounts left in the account at the end of
the previous year. Your employer isn't permitted to refund any part of the
balance to you. See Qualified reservist distributions, earlier.
Flexible Spending Arrangement

Plans may allow up to $570 of unused amounts remaining at the end of the
plan year to be paid or reimbursed for qualified medical expenses you incur in
the following plan year. The plan may specify a lower dollar amount as the
maximum carryover amount. If the plan permits a carry-over, any unused
amounts in excess of the carryover amount are forfeited. The carryover doesn't
affect the maximum amount of salary reduction contributions that you care
permitted to make.

A plan may allow either the grace period or a carryover, but it may not allow
both.
Affordable Care Act - Employer
Shared Responsibility
Employer Shared Responsibility

The employer shared responsibility provisions were added under section

4980H of the Internal Revenue Code by the Affordable Care Act. Under these
provisions, certain employers (called applicable large employers or ALEs) must
either offer health coverage that is “affordable” and that provides “minimum
value” to their full-time employees (and offer coverage to the full-time
employees’ dependents), or potentially make an employer shared responsibility
payment to the IRS, if at least one of their full-time employees receives a
premium tax credit for purchasing individual coverage on a Health Insurance
Marketplace (Marketplace), also called the Exchange.
Employer Shared Responsibility

Whether an employer is an ALE and is therefore subject to the employer shared

responsibility provisions depends on the size of its workforce. In general,
employers employing at least a certain threshold number of employees
(generally 50 full-time employees including full-time equivalent employees,
which means a combination of part-time employees that count as one or more
full-time employees) are ALEs. The vast majority of employers fall below the
ALE size threshold and therefore are not subject to the employer shared
responsibility provisions.
Employer Shared Responsibility

Employers that are subject to the employer shared responsibility provisions

(that is, ALEs) are required to report information about whether they offered
coverage to employees and if so, information about the offer of coverage. ALEs
are required to send this information to the IRS on Form 1094-C, Transmittal of
Employer-Provided Health Insurance Offer and Coverage Information Returns,
and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.
ALEs are also required to send the Form 1095-C for each employee to that
employee. The information on these forms is used to determine whether an ALE
owes a payment under the employer shared responsibility provisions and
whether employees are eligible for the premium tax credit. For additional
information, see the section 6056 final regulations
Employer Shared Responsibility

There are two different circumstances in which an ALE may owe an employer
shared responsibility payment. An ALE is liable for an employer shared
responsibility payment only if:

(a) The ALE does not offer coverage or offers coverage to less than 95 percent
of its full-time employees (and their dependents), and at least one of the
full-time employee receives a premium tax credit to help pay for coverage
through a Marketplace; OR

(b) The ALE offers coverage to at least 95 percent of its full-time employees
(and their dependents), but at least one full-time employee receives a premium
tax credit to help pay for coverage through a Marketplace, which may occur
because the employer did not offer coverage to that particular employee or
because the coverage the employer offered that employee was either
unaffordable or did not provide minimum value.
Employer Shared Responsibility

If an ALE does not offer coverage or offers coverage to less than 95 percent of
its full-time employees (and their dependents) for an entire calendar year, and
at least one of its full-time employees receives a premium tax credit, the ALE
owes an employer shared responsibility payment equal to the number of
full-time employees the ALE employed for the calendar year (minus up to 30)
multiplied by $2,000 (as adjusted).
Employer Shared Responsibility

For an ALE that offers coverage to at least 95 percent of its full-time employees
(and their dependents), but has one or more full-time employees who receive a
premium tax credit, the payment is computed separately for each month. The
amount of the payment for the month equals the number of full-time
employees who receive a premium tax credit for that month multiplied by 1/12
of $3,000 (as adjusted). The amount of the payment for any calendar month is
capped at the number of the ALE’s full-time employees for the month (minus up
to 30) multiplied by 1/12 of $2,000 (as adjusted). The cap ensures that the
payment for an ALE that offers coverage can never exceed the payment that
ALE would owe if it did not offer coverage.
Employer Shared Responsibility

The employer shared responsibility provisions provide for an inflation

adjustment beginning in calendar years after 2014.

In the case of any calendar year after 2014, the applicable per-employee dollar
amounts of $2,000 and $3,000 are increased based on the premium adjustment
percentage (as defined in section 1302(c)(4) of the Affordable Care Act) for the
year, rounded to the next lowest multiple of $10.

For calendar year 2023, the adjusted $2,000 amount is $2,880 and the adjusted
$3,000 amount is $4,320.
Health Savings Accounts - Code
Section 223
Health Savings Accounts

A health savings account (HSA) is an account owned by a qualified individual

who is generally your employee or former employee. Any contributions that you
make to an HSA become the employee's property and can't be withdrawn by
you. Contributions to the account are used to pay current or future medical
expenses of the account owner, their spouse, and any qualified dependent. The
medical expenses must not be reimbursable by insurance or other sources and
their payment from HSA funds (distribution) won't give rise to a medical
expense deduction on the individual's federal income tax return.
Health Savings Accounts

Eligibility. A qualified individual must be covered by a High Deductible Health

Plan (HDHP) and not be covered by other health insurance except for permitted
insurance listed under section 223(c)(3) or insurance for accidents, disability,
dental care, vision care, long-term care, or (in the case of months beginning
after March 31, 2022, and before January 1, 2023, and plan years beginning on
or before December 31, 2021, or after December 31, 2022, and before January
1, 2025) telehealth and other remote care. For calendar year 2023, a qualifying
HDHP must have a deductible of at least $1,500 for self-only coverage or
$3,000 for family coverage and must limit annual out-of-pocket expenses of the
beneficiary to $7,500 for self-only coverage and $15,000 for family coverage.
There are no income limits that restrict an individual's eligibility to contribute to
an HSA nor is there a require-ment that the account owner have earned income
to make a contribution.
Health Savings Accounts

Exceptions. An individual isn't a qualified individual if he or she can be claimed

as a dependent on another per-son's tax return. Also, an employee's
participation in a health FSA or health reimbursement arrangement (HRA)
generally disqualifies the individual (and employer) from making contributions
to their HSA. However, an individual may qualify to participate in an HSA if he or
she is partici-pating in only a limited-purpose FSA or HRA or a post-deductible
FSA. For more information, see Other em-ployee health plans in Pub. 969.
Health Savings Accounts

Employer contributions. Up to specified dollar limits, cash contributions to the

HSA of a qualified individual (de-termined monthly) are exempt from federal
income tax withholding, social security tax, Medicare tax, and FUTA tax if you
reasonably believe that the employee can ex-clude the benefits from gross
income. For 2023, you can contribute up to $3,850 for self-only coverage under
an HDHP or $7,750 for family coverage under an HDHP to a qualified
individual's HSA.
The contribution amounts listed above are increased by $1,000 for a qualified
individual who is age 55 or older at any time during the year. For two qualified
individuals who are married to each other and who are each age 55 or older at
any time during the year, each spouse's contribu-tion limit is increased by
$1,000, provided each spouse has a separate HSA. No contributions can be
made to an individual's HSA after he or she becomes enrolled in Med-icare Part
A or Part B.
Health Savings Accounts

Nondiscrimination rules. Your contribution amount to an employee's HSA must

be comparable for all employ-ees who have comparable coverage during the
same pe-riod. Otherwise, there will be an excise tax equal to 35% of the amount
you contributed to all employees' HSAs.
For guidance on employer comparable contributions to HSAs under section
4980G in instances where an em-ployee hasn't established an HSA by
December 31 and in instances where an employer accelerates contributions for
the calendar year for employees who have incurred qualified medical expenses,
see Regulations section 54.4980G-4.
Dependent Care - Code Section
129
Dependent Care

Dependent Care Assistance

● This exclusion applies to household and dependent care services you
directly or indirectly pay for or provide to an employee under a written
dependent care assistance program (DCAP) that covers only your
employees.
● The services must be for a qualifying person's care and must be provided
to allow the employee to work.
● These requirements are basically the same as the tests the employee
would have to meet to claim the dependent care credit if the employee
paid for the services.
Dependent Care

Employee. For this exclusion, treat the following individuals as employees.

● A current employee.
● A leased employee who has provided services to you on a substantially
full-time basis for at least a year if the services are performed under your
primary direction or control.
● Yourself (if you’re a sole proprietor).
● A partner who performs services for a partnership.
Dependent Care

Exclusion from wages. You can exclude the value of benefits you provide to an
employee under a DCAP from the employee's wages if you reasonably believe
that the employee can exclude the benefits from gross income.

An employee can generally exclude from gross income up to $5,000 ($2,500 if

married filing separately) of benefits received under a DCAP each year.
However, the exclusion can't be more than the smaller of the earned income of
either the employee or employee's spouse. Special rules apply to determine the
earned income of a spouse who is either a student or not able to care for
themselves.
Dependent Care

Exception for highly compensated employees. You can't exclude dependent

care assistance from the wages of a highly compensated employee unless the
benefits provided under the program don't favor highly compensated
employees and the program meets the requirements described in section
129(d) of the Internal Revenue Code.

For this exclusion, a highly compensated employee for 2023 is an employee

who meets either of the following tests.
1. The employee was a 5% owner at any time during the year or the preceding
year.
2. The employee received more than $135,000 in pay for the preceding
year.You can choose to ignore test (2) if the employee wasn't also in the
top 20% of employees when ranked by pay for the preceding year.
Dependent Care

Form W-2. Report the value of all dependent care assistance you provide to an
employee under a DCAP in box 10 of the employee's Form W-2. Include any
amounts you can't exclude from the employee's wages in boxes 1, 3, and 5.
Report in box 10 both the nontaxable portion of assistance (up to $5,000) and
any assistance above that amount that is taxable to the employee.

Example. Oak Co. provides a dependent care assistance FSA to its employees
through a cafeteria plan. In addition, it provides occasional on-site dependent
care to its employees at no cost. Emily, an employee of Oak Co., had $4,500
deducted from Emily’s pay for the dependent care FSA. In addition, Emily used
the on-site dependent care several times. The fair market value of the on-site
care was $700. Emily's Form W-2 should report $5,200 of dependent care
assistance in box 10 ($4,500 FSA plus $700 on-site dependent care). Boxes 1,
3, and 5 should include $200 (the amount in excess of the nontaxable
assistance), and applicable taxes should be withheld on that amount.
Group Term Life Insurance - Code
Section 79
Group Term Life Insurance

Group-Term Life Insurance Coverage

This exclusion applies to life insurance coverage that meets all the following
conditions.
● It provides a general death benefit that isn't included in income.
● You provide it to a group of employees. See The 10-employee rule, later.
● It provides an amount of insurance to each employee based on a formula
that prevents individual selection. This formula must use factors such as
the employee's age, years of service, pay, or position.
● You provide it under a policy you directly or indirectly carry. Even if you
don't pay any of the policy's cost, you’re considered to carry it if you
arrange for payment of its cost by your employees and charge at least one
employee less than, and at least one other employee more than, the cost of
their insurance. De-termine the cost of the insurance, for this purpose, as
explained under Coverage over the limit, later.
Group Term Life Insurance

Group-term life insurance doesn't include the following insurance.

● Insurance that doesn't provide general death benefits, such as travel
insurance or a policy providing only accidental death benefits.
● Life insurance on the life of your employee's spouse or dependent.
However, you may be able to exclude the cost of this insurance from the
employee's wages as a de minimis benefit.
● Insurance provided under a policy that provides a permanent benefit (an
economic value that extends beyond 1 policy year, such as paid-up or
cash-surrender value), unless certain requirements are met. See
Regulations section 1.79-1.
Group Term Life Insurance

Employee. For this exclusion, treat the following individuals as employees.

● A current common-law employee.
● A full-time life insurance agent who is a current statutory employee.
● An individual who was formerly your employee under (1) or (2).
● A leased employee who has provided services to you on a substantially
full-time basis for at least a year if the services are performed under your
primary direction and control.
Group Term Life Insurance

The 10-employee rule. Generally, life insurance isn't group-term life insurance
unless you provide it at some time during the calendar year to at least 10
full-time employees.
For this rule, count employees who choose not to receive the insurance as if
they do receive insurance, unless, to receive it, they must contribute to the cost
of benefits other than the group-term life insurance. For example, count an
employee who could receive insurance by paying part of the cost, even if that
employee chooses not to receive it. However, don't count an employee who
chooses not to receive insurance if the employee must pay part or all of the
cost of permanent benefits in order to obtain group-term life insurance. A
permanent benefit is an economic value extending beyond 1 policy year (for
example, a paid-up or cash-surrender value) that is provided under a life
insurance policy.
Group Term Life Insurance

Exclusion from wages. You can generally exclude the cost of up to $50,000 of
group-term life insurance coverage from the wages of an insured employee.
You can exclude the same amount from the employee's wages when figuring
social security and Medicare taxes. In addition, you don't have to withhold
federal income tax or pay FUTA tax on any group-term life insurance you
provide to an employee.

Coverage over the limit. You must include in your employee's wages the cost of
group-term life insurance beyond $50,000 worth of coverage, reduced by the
amount the employee paid toward the insurance. Report it as wages in boxes 1,
3, and 5 of the employee's Form W-2. Also, show it in box 12 with code “C.” The
amount is subject to social security and Medicare taxes, and you may, at your
option, withhold federal income tax.
Group Term Life Insurance

Figure the monthly cost of the insurance to include in the employee's wages by
multiplying the number of thousands of dollars of all insurance coverage over
$50,000 (figured to the nearest $100) by the cost shown in Table 2-2. For all
coverage provided within the calendar year, use the employee's age on the last
day of the employee's tax year. You must prorate the cost from the table if less
than a full month of coverage is involved.
Group Term Life Insurance

Figure the monthly cost of the insurance to include in the employee's wages by
multiplying the number of thousands of dollars of all insurance coverage over
$50,000 (figured to the nearest $100) by the cost shown in Table 2-2. For all
coverage provided within the calendar year, use the employee's age on the last
day of the employee's tax year. You must prorate the cost from the table if less
than a full month of coverage is involved.
Group Term Life Insurance
Group Term Life Insurance

You figure the total cost to include in the employee's wages by multiplying the
monthly cost by the number of months' coverage at that cost.

Example. Tom's employer provides Tom with group-term life insurance

coverage of $200,000. Tom is 45 years old, isn't a key employee, and pays $100
per year toward the cost of the insurance. Tom's employer must include $170 in
Tom’s wages. The $200,000 of insurance coverage is reduced by $50,000. The
yearly cost of $150,000 of coverage is $270 ($0.15 x 150 x 12), and is reduced
by the $100 Tom pays for the insurance. The employer includes $170 in boxes
1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with
code “C.”
Group Term Life Insurance

Exception for key employees. Generally, if your group-term life insurance plan
favors key employees as to participation or benefits, you must include the
entire cost of the insurance in your key employees' wages. This exception
generally doesn't apply to church plans. When figuring social security and
Medicare taxes, you must also include the entire cost in the employees' wages.
Include the cost in boxes 1, 3, and 5 of Form W-2. However, you don't have to
withhold federal income tax or pay FUTA tax on the cost of any group-term life
insurance you provide to an employee.

For this purpose, the cost of the insurance is the greater of the following
amounts.
● The premiums you pay for the employee's insurance. See Regulations
section 1.79-4T(Q&A 6) for more in-formation.
● The cost you figure using Table 2-2.
Group Term Life Insurance

For this exclusion, a key employee during 2023 is an employee or former

employee who is one of the following individuals. See Code Section 416(i).
● An officer having annual pay of more than $215,000.
● An individual who for 2023 is either of the following.
● A 5% owner of your business.
● A 1% owner of your business whose annual pay is more than $150,000.