Imputed income from life insurance: what you need to know

For many employees, the opportunity to purchase group-term life insurance through employers is an expected benefit of the job. However, group-term life insurance policyholders should be aware of imputed income, a taxable event that can result from having more than $50,000 in life insurance. In short, group-term life insurance greater than $50,000 is considered a taxable benefit, and any imputed income from the benefit must be reflected on an individual’s W-2, as Internal Revenue Service Publication 15-B notes.
Furthermore, employers must be aware that imputed income is subject to Medicare and Social Security taxation, as well as potential federal income tax withholding, per IRS guidance.

According to the IRS, imputed income can come into play for policies over $50,000 if an employer contributes to an employee’s policy payment or if the employer “arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other.” This, per IRS parlance, is referred to as the “straddle” rule. Either circumstance means the group-term life insurance policy is carried directly or indirectly by the company and is thus a taxable fringe benefit, per the IRS.

According to the IRS, imputed income is calculated this way for life insurance policies in excess of $50,000:

-- Subtract $50,000 from the total value of the life insurance policy.

-- Divide this figure (the excess life insurance) coverage by 1,000.

-- Multiply this figure by the number of months the policy covered in the tax year.

-- Multiply this figure by the corresponding IRS cost of $1,000 per coverage per the employee’s age bracket (see below).

-- Subtract the annual cost contributed by the individual toward insurance. For reference, here is the most recent IRS age-band table used for coverage over $50,000:

Age                                      Cost
Under 25                            $.05
25 through 29                    $.06
30 through 34                    $.08
35 through 39                    $.09
40 through 44                    $.10
45 through 49                    $.15
50 through 54                    $.23
55 through 59                    $.43
60 through 64                    $.66
65 through 69                    $1.27
70 and older                      $2.06

For instance, a 57-year-old employee with $150,000 in group-term life insurance for 12 months of 2015 contributing $240 annually would have $278 in imputed income.

The calculation: ((12 months) x ($150,000-$50,000)/1,000) x (0.43)) - $240.

Employers and employees need to be aware of the tax ramifications of group-term life insurance and imputed income. If you would like more information on these subjects or are interested in strategic insurance solutions for your company, call 847.307.6100 (Chicago), 972-770-5010 (Dallas) or 405-241-9462 (Oklahoma City) to speak to a Plexus professional, or visit us on the Web at plexusgroupe.com.

References

“Group-Term Life Insurance.” Internal Revenue Service, IRS.gov. May 10, 2015.

Publication 15-B: Employer’s Tax Guide to Fringe Benefits. Department of the Treasury, Internal Revenue Service, 2015.