Tennessee Insurance Practice Exam

Under federal tax laws, what is the tax treatment for an employer providing $50,000 of a contributory group Term Life plan to all its eligible employees?

1. The employer cannot deduct any premiums

2. All premiums paid are tax-free for the employer

3. Portion of the premiums paid for by the employer may be a tax deduction

4. Only the employee’s portion of premiums is deductible

The correct answer is: Portion of the premiums paid for by the employer may be a tax deduction

The tax treatment regarding an employer providing a contributory group term life insurance plan reveals an important aspect of how these plans operate under federal tax laws. When employers offer this type of insurance, they typically share the cost of premiums with their employees. In this case, the employer can deduct the portion of the premiums they pay on behalf of the employees as a business expense. This is because the premiums constitute an ordinary and necessary business expense that supports employee benefits. The tax code permits employers to deduct these expenses, thereby reducing the overall tax liability. Additionally, it's crucial to understand that the IRS allows for a specific tax-free amount for group term life insurance. Generally, the first $50,000 of coverage is not taxed as income to the employee, but any coverage over this limit or certain conditions can trigger taxable income. Thus, while premiums can indeed be deductible for the employer, this deduction applies only to the employer's portion of the contributions rather than making the entire premium tax-free. The other statements don't align with these provisions in tax law. For example, a complete disallowance of premium deductions would contradict the general treatment of employee benefits, while indicating that all premiums are tax-free for the employer or only the employee's portion is deductible misunderstand