Q: We would like to provide life insurance for our lead pastor and his spouse. Is this a taxable benefit?
A: In some cases, an employer-provided life insurance policy can be considered a nontaxable fringe benefit. However, specific criteria must be met for this to occur.
Consider the following scenarios:
- Church ABC purchases life insurance policies for all full-time employees. The policy provides a death benefit to a beneficiary upon the employee’s death. The amount of the death benefit is $50,000 and the church pays the entire premium.
- Church XYZ purchases a life insurance policy for its lead pastor. The policy provides a $500,000 death benefit to the pastor’s beneficiary. The church pays the entire premium.
According to the IRS, only the first scenario can be treated as a nontaxable fringe benefit, while the second example will result in taxable income for the lead pastor.
As stated in IRS Publication 15-B, there are several criteria that help determine whether life insurance policies provided by an employer results in taxable or nontaxable income. According to the publication, an insurance policy with coverage up to $50,000 will result in a nontaxable fringe benefit if:
- It provides a general death benefit that is not included in income. (This excludes travel insurance or a policy that only provides accidental death benefits.)
- It is provided to a group of employees—at least 10 employees—or to all full-time employees. Some exceptions exist if you do not meet the 10-employee rule.
- The amount is based on a formula such as an employee’s age, years of service, pay, or position.
- It is provided under a policy the employer directly or indirectly carries.
If you meet this criteria, then the first $50,000 in a nontaxable fringe benefit. Only the portion above $50,000 is taxable. To determine how much, you must use Table 2-2 in Publication 15-B to compute the taxable income amount. If you provide life insurance for the pastor’s spouse, the entire policy will result in taxable income unless the spouse is an employee that meets the criteria above. The only exception is if the face amount of the policy is not more than $2,000. In this case, the church can consider it a de minimis fringe benefit.
Similarly, if you provide life insurance to a church employee but you don’t meet these criteria, then the entire policy will result in taxable income.
Example: First Church provides a $200,000 life insurance policy for its lead pastor who is 45 years old, and a $25,000 life insurance policy for her husband, who is also 45 years old, but is not an employee of the church. The church pays the entire premium. In this example, the cost of insurance that exceeds $50,000 will result in taxable income of $270 for the lead pastor. Additionally, the policy for the spouse will result in taxable income of $45 because the spouse is not an employee. See below for the computation.
Computing Taxable Income
To figure the monthly cost of the insurance to include in the employee’s wages, the church should multiply 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, from IRS Publication 15-B.
Multiply the monthly cost by the number of full months coverage to calculate the taxable amount. The church should report it as wages in box 1 of the minister’s Form W-2, and in boxes 1, 3, and 5 of the non-minister employee’s Form W-2. The church should also report it in box 12 with code “C.” This amount is subject to social security and Medicare taxes, as applicable, and you may, at your option, withhold federal income tax.
