Employer Sponsored Life Insurance, the Regular Rate, and the FLSA

Today’s FLSA Question: I am a career firefighter. The city provides a $90,000 life insurance policy for all firefighters. I noticed the city included a portion of the cost of the insurance policy as taxable income in my last paycheck of 2019. I asked our finance department for an explanation. I was told the IRS requires some fringe benefits, like life insurance policies, to be added to an employee’s taxable gross income for tax purposes. Is this true? But this got me thinking. Does this money also need to be included in my regular rate? After all, I am being taxed on that money, why shouldn’t it be included in my regular and more importantly my overtime rate?

Answer: Surprisingly, you are not the first person to ask this question. The folks in your finance department are on top of their game. This is an IRS tax requirement. Additionally, according to the U.S. Department of Labor (DOL), income reported on an end-of-the-year pay stub attributable to employer-sponsored group life insurance can be excluded from the employee’s regular rate. For those interested, here is a little more detail on this requirement and the DOL’s position.

Section 79 of the Internal Revenue Code (IRC) defers employee tax liability for employer-sponsored life insurance policies up to $50,000. The same regulation requires employers report the cost of providing employer-sponsored group life insurance that is in excess of $50,000.

For example, if an employer provides firefighters with a $50,000 life insurance policy, the firefighter would not have any tax liability as a result of that fringe benefit. However, if the employer—like your employer—provides firefighters a group life insurance policy in excess of $50,000 the cost attributable to the excess (cost associated with the difference between a $50,000 policy and the actual cost for the policy) must be reported by the employer as taxable income to the employee.

The FLSA requires “all remuneration for employment paid to, or on behalf of, the employee” included in an employee’s regular rate. However, in a March 2020 Opinion Letter, Cheryl Stanton, the DOL’s Administrator of the Wage and Hour Division wrote: “[t]here is no presumption that income taxable under the IRC (Internal Revenue Code) must be included in the regular rate.” Additionally, “[t]axable income is included in the regular rate if it represents ‘remuneration for employment…” and “[r]egardless of its treatment for income tax purposes, an employer’s contributions to a group-term life insurance policy need not be included in an employee’s regular rate.”

The opinion letter contained one caveat. The letter presumed the amount of money being added to the employee’s taxable income represents “genuine employer contributions” made on behalf of the employee for “group-term life insurance coverage.” In the event an employee purchased (through payroll deduction) additional life insurance, through his or her employer, this exclusion would not be applicable.

Here is a copy of the March 26, 2020 opinion letter.