An employer makes group term life insurance for spouses and dependents available in the amount of $5,000.00. If the employee selects this coverage, the employee pays for this coverage out of after tax dollars. The employer does not pay any part of the cost of the coverage. Is there any tax effect to the employee of purchasing this coverage?

No, the death benefit would be received income tax free just like any other personally purchased life insurance.

Actually I was asking if the employee would have any imputed income similar to what happens under Section 79 for group term insurance for employees.

This is a controversial issue. The IRS says that if the employee premium rates "straddle" Table I (that is, at least one employee pays more than the Table I rate applicable to section 79 group-term life and at least one employee pays more) then your dependent life is considered employer-provided even if 100% of the premiums are paid on an after-tax basis by employees. This is hogwash IMHO but that is the IRS position.

Even if your plan straddles Table I, the IRS will treat the arrangement as nontaxable if the face amount of insurance is not more than $2,000. If the amount exceeds $2,000 the difference between the amount paid by the employee and the Table I rate *may* be excludible as a deminimis fringe benefit if the difference is deminimis.

You should talk to your carrier as they should be familiar with this issue . . .