As the year begins to wind down, employers should remember to have on their “to do” list a review of any benefits which need to be reported as imputed income. In general, the benefits that an employer provides to its employees are excluded from an employee’s taxable income. However, for employer-sponsored group term life insurance, there are some exceptions to this taxability exclusion.
The Internal Revenue Code (IRC) details the tax implications for employer-sponsored group term life insurance, excluding the cost of the first $50,000 in employer provided coverage. The cost of any excess coverage is subject to federal income and FICA (Social Security and Medicare) taxes. “Cost” as referred to here does not mean the premium paid by the employer but the cost determined under the IRC’s Table I rates [at right]. The “cost” of the coverage added to an employee’s gross income is commonly referred to as “imputed income.” The “cost” is usually included in one of the employee’s last paychecks for the year. The employer withholds the employee’s portion of FICA taxes and pays its FICA share. This information is also reported on the employee’s W-2.
There are several other instances, besides the employer provided coverage exceeding a benefit in the amount of $50,000, which would require additional taxable income to the employee.
Employer-sponsored voluntary life coverage. If an employee is paying the entire cost of the life coverage on an after-tax basis, the coverage may still be considered partly-employer provided. This would occur if an employee’s post-tax contributions are less than the value of the excess coverage calculated using the IRS’ table of rates.
Employer-sponsored voluntary life insurance paid for with pre-tax dollars under a Section 125 plan. If an employee pays for coverage using pre-tax dollars, the coverage is treated, for tax purposes, as if the employer paid those premiums. Thus, the costs for any amounts that exceed $50,000 must be included as income.
Employers must include in their employees’ wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance on an after-tax basis. The $50,000 includes any employer provided group term life benefit and any pre-tax life coverage for which the employee pays.
Also, remember to review any dependent life insurance coverage offered. Many employers are under the assumption that life insurance provided for dependents is taxed in the same manner as employee life insurance. It is not. Employer-provided dependent life insurance is taxable unless the amount of the insurance is less than $2,000. For coverage exceeding $2,000 the full amount of the dependent life insurance is taxable, including the first $2,000.
As employers begin to review information for its employees’ W-2s it should remember to consider imputed income for excess life insurance. An employer should address any concerns regarding group-term life insurance and imputed income with its tax advisor.