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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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