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General Restrictions

Section 125 of the Internal Revenue Code only allows employees to pay premiums with tax-free income if the coverage is provided by the employee's employer. Coverage purchased on an individual basis or through another employer are not eligible.

Life Insurance Restrictions

The only life insurance eligible for tax-free treatment under Section 125 is Employee Group Term Life Insurance. It must cover only employees, not dependents. Coverage must be provided under a group policy. Individual policies are not eligible. It must be term insurance with no cash value. Also, only the premium on the first $50,000 of coverage is eligible. This includes any employer-provided coverage. If more than $50,000 of life insurance is provided, the employee must either pay the premium for coverage over $50,000 with after-tax income or pay taxes based on the imputed value of coverage over $50,000 using a table provided by the IRS.

Disability Insurance Restrictions

Any disability insurance covering the loss of income due to accident or sickness is eligible, however, if the premium is either paid by the employer, or paid by the employee with tax-free income, the benefits under the coverage is taxable. If the premiums are paid with after-tax income, the benefits received under the coverage would not be taxable.

Cancer and Dread Disease Restrictions

Premiums paid for cancer or dread disease coverage may not be tax-free if the policy provides for a return of premium. Please check with your tax advisor before you allow the payment of cancer or dread disease premiums with tax-free income.


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