SERVICE PROVIDES RULES FOR REPORTING FICA TAXES ON GROUP-TERM LIFE INSURANCE BENEFITS.

Notice 88-82

This notice sets forth the reporting requirements for the social security taxes imposed on amounts paid for group-term life insurance that are includible in gross income under section 79 of the Internal Revenue Code, as a result of amendments made by section 9003(a)(2) of the Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203, (OBRA 1987), to section 3121(a)(2)(C) of the Code. Generally speaking, the amount includible in gross income under section 79 is the cost of such insurance to the extent such cost exceeds the cost of $50,000 of insurance.

BACKGROUND

Prior to the enactment of section 9003(a)(2) of OBRA 1987, the cost of group-term life insurance was excluded from wages for social security tax purposes under section 3121(a)(2) of the Code.

Section 9003(a)(2) of OBRA 1987 amended section 3121(a)(2)(C) of the Code to provide that the exception from "wages" for payments made on account of death does not apply to a payment for group-term life insurance to the extent that such payment is includible in the gross income of the employee. The amendment applies with respect to payments for group-term life insurance in effect after December 31, 1987.

Section 79 of the Code provides generally that there shall be included in the gross income of an employee for the taxable year an amount equal to the cost of group-term life insurance on the employee's life provided for part or all of such year under a policy (or policies) carried directly or indirectly by the employer (or employers); but only to the extent that such cost exceeds the sum of the cost of $50,000 of such insurance and the amount (if any) paid by the employee toward the purchase of such insurance.

Employers are reminded that the cost of group-term life insurance includible in gross income under section 79 of the Code is subject to the provisions of section 3121(a)(2) as amended even if provided through a cafeteria plan described in section 125.

There is no change in the income tax withholding or Federal Unemployment Tax Act requirements on these amounts. Sections 3401(a)(14) and 3306(b)(2) of the Code still except from the definition of "wages" remuneration in the form of group-term life insurance on the life of an employee.

REPORTING REQUIREMENTS

Payments for group-term life insurance that are includible in the gross income and in the "wages" of the employee may be treated by the employer as though paid by the pay period, by the quarter, or on any other basis so long as the payments are treated as paid at least as often as once a year. The employer need not inform the Service of a formal choice of payment dates or of the dates chosen. Furthermore, the same choice need not be made for all employees. The employer may change methods at any time, so long as all such payments includible in a calendar year are treated as paid by December 31 of the calendar year.

The amounts includible in "wages" for social security tax purposes should be included in box 10 of the employee's Form W-2 as wages, tips, and other compensation and, if applicable, in box 13 as social security wages.

An employer may pay the taxes imposed on employees under section 3101 of the Code without deduction from the employee's wages under an agreement between them. Generally, such payments constitute additional wages for purposes of income tax withholding, FICA and the taxes imposed under the Federal Unemployment Tax Act. See Situation 1 in Rev. Rul. 86-14, 1986-1 C.B. 304; modifying Rev. Rul. 74-75, 1974- 1 C.B. 19. For guidelines in computing federal employment tax liability in this situation, see Rev. Proc. 81-48, 1981-2 C.B. 623.

RELIANCE

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure. Guidance for reporting the cost of group-term life insurance that is includible in 'wages' for Social Security tax purposes for former employees, including retirees, will be provided in the future.

DRAFTING INFORMATION

The principal author of this notice is Philip M. Corn of the Employee Benefits and Exempt Organizations Division. For further information regarding this notice contact Mr. Corn on (202) 566-6212 (not a toll-free call).