EEGTL Tax Overview
EEGTL tax is paid by each individual member of an employer-sponsored group term life insurance plan. Like IRA, 401(k) or medical plan contributions, it is typically deducted from each plan member’s paycheck.
If each individual member’s coverage remains under $50,000, federal law allows employees to make tax-free contributions to their employer’s group term life insurance plan. However, some group term life insurance plans now carry individual death benefits in excess of that amount. EEGTL tax applies to the portion of each employee’s contribution that covers death benefits beyond the $50,000 limit. It also applies to contributions to plans that provide coverage for members’ dependents in excess of $2,000.
Group term life insurance carries a fair market value that is tax-preferred but not tax-exempt. This value is calculated according to the IRS’s Uniform Premium Table I and may vary slightly relative to the plan’s premiums. While it is not exempt from federal income tax, it is not subject to withholding. However, FICA and Medicare payments are withheld from each employee’s fair-value contributions. As such, EEGTL tax accrues at a slightly lower rate than regular-income tax.
EEGTL Tax: What You Need to Know
EEGTL tax applies to any employer-sponsored group term life insurance contributions on coverages in excess of $50,000. Employees can avoid paying EEGTL tax on policies with sub-$50,000 coverages thanks to Section 125 of the IRS code. Known as “cafeteria plans,” employer-sponsored benefit arrangements set up under this statute are not required to withhold federal income, Medicare, FICA and FUTA taxes from employee contributions.
Typical benefits provided in a Section 125 cafeteria plan include health insurance, dental insurance, special supplementary coverages like accidental death and dismemberment, and group term life insurance. Within the Section 125 framework, group term life insurance is an outlier: It is the only “fringe benefit” subject to a cap on tax-free employer contributions.
For an employer-provided life insurance to be considered part of a “group plan,” it must meet several requirements. First, it must be provided to more than 10 full-time employees. Even if a business has more than 10 employees, it may not achieve the “10 employee rule” if it requires its employees to pay for coverage that extends more than one year beyond their termination date. Provided that they provide group life benefits for all of their full-time employees, the IRS will exempt businesses with fewer than 10 employees from this requirement.
Under Section 125, group term life insurance benefits must be distributed more or less equally among eligible employees. If certain “key” employees receive benefits valued at 125 percent or more of “non-key” employees’ benefits, the “key” employees must report them as taxable income and the $50,000 benefit exemption does not apply. In this case, EEGTL tax is assessed on the entire fair value of the plan.
Former employees who elect to continue receiving group term life insurance benefits in excess of $50,000 are responsible for paying their own EEGTL tax.