Jump to content

Life Insurance and Imputed Income


Guest LLandau
 Share

Recommended Posts

Guest LLandau

With regard to a voluntary supplemental life plan available to employees, where employees pay for the total amount of the premiums, is any amount of the benefit considered imputed income?

The question arises because the employees, by virtue of their being a part of a employer sponsored plan, are receiving premium rates more favorable than the rates they would pay as individuals outside of an employer sponsored plan.

How would the answer change with after-tax or pre-tax dollars?

As you can probably guess.... I am completely bewildered by this journey into IRC Section 79 and any guidance would be appreciated.

Link to comment
Share on other sites

What type of voluntary supplemental life?

What is the Death Benefit?

What do you mean by employer sponsored?

The answer depends on the type of plan and also the method of payment (pre or post tax). It might matter if the plan is facilitated but not sponsored.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

I was under the impression that if the supplemental life is group term, and the rates that the employees pay are less than the Section 79 Table I rates then the benefit is taxable to the extent that the group rates are lower then the Table I rates.

Link to comment
Share on other sites

Guest LLandau

Apparently this is a supplemental life policy that will be offered as an option through a cafeteria plan. Because it is through a cafeteria plan, the employees will pay 100% of the premiums, but on a pre-tax basis. The premium rates will be higher than the Table I rates.

It seems to me that when life-insurance coverage is purchased with pre-tax dollars, the imputed income is the higher of either Table I cost for coverage or the actual premium amount.

Am I correct? Will the employees, therefore, not be responsible for additional taxes?

Thank you in advance for any help.

Link to comment
Share on other sites

If premiums are lower than the Table I rates, it would be stupid to try to do it under a section 79 or 125 plan (which also imputes income based on Table I). The actual premiums can be paid by the employer and added to the employee's income for the year without complying with Section 79. And the employer can pick and choose whom to cover.

Section 79 does not give a choice, although LLandau's interpretation is reasonable. Section 79 requires that employer-paid life insurance coverage in excess of $50,000 be imputed to the employee as income based on the Table I rate. The employees are responsible for taxes on the income imputed to them, and the income must be disclosed on for W-2.

Link to comment
Share on other sites

Guest LLandau

Boy, I feel dense.

So, Vebaguru, what you are saying is that I am correct.......when life-insurance coverage is purchased with pre-tax dollars, the imputed income is the higher of either Table I cost for coverage or the actual premium amount and employees, because they are paying premiums higher than Table I rates, will not be responsible for additional taxes?

Sorry for my sluggish thinking.... it must be time for a weekend.

Link to comment
Share on other sites

If the employee pays the cost of the coverage with after-tax dollars there is no tax issue. We added voluntary life as a benefit two years ago. This was on top of a very generous company paid group term life policy of 2 times annual to a maximum of $300,000. We chose to offer the voluntary coverage - no underwriting up to a maximum of $500,000 - as an after-tax benefit.

Link to comment
Share on other sites

It is my understanding that when the group term insurance is paid for by the employee on a pre-tax basis that "changes it" to an employer paid insurance. In our case that would add it to the group term benefit already being provided for our employees. We have very few employees with less than 50,000 provided by the company, so virtually all the voluntary life would have had to be added to the imputed income calculations currently handled within our payroll system. Just seemed like more trouble than it was worth.

Link to comment
Share on other sites

The Regulations under Section 79 permit both individual policies and permanent insurance to be included under the broad definition of "group term life insurance arrangement". And participants in 125 plans and health reimbursement plans may elect to have life insurance as a plan benefit with premiums paid with pre-tax dollars.

In each of those cases, the amount of current income imputed to the participant is based on the face amount of insurance in force (in excess of $50,000) and the factor from Table I that corresponds to the participant's age. The actual premium paid does not affect the amount of taxable income imputed to the participant, although I endorsed your logic above.

It would be stupid, therefore, if actual premiums are lower than the Table I amounts to purchase the insurance coverage through a tax-deducted arrangements. Such premiums paid by the employer should simply be added to the employee's W-2.

This subject is treated in some detail in IRS Publication 525.

Sandra is right about 2 things: (1) When contributions are pre-tax they are converted to employer contributiosn, and (2) it is a pain for a payroll system if the employer has another group-term life insurance plan and may not be worth it.

Link to comment
Share on other sites

Does this make sense? If a person is paying 100% of the cost of supplemental insurance, and the supplemental rates are higher than the Table I rates then there would be no imputed income, right?

Also, is the amount of supplemental life in excess of the first $50,000 eligible for pre-tax premiums?

Link to comment
Share on other sites

It doesn't make sense to me. If the employee is paying for the premiums, it is generally either on an after-tax basis pursuant to payroll withholding. If the employee has elected life insurance coverage under a Section 125 arrangement, amounts withheld from his paycheck will be pre-tax and the value of coverage by insurance in excess of $50,000 will be imputed to the employee as income.

The entire life insurance premium is eligible for payment through the 125 plan. cf, Regs. Sec. 1.125-2T. This cross-references to Section 79, and the Regs. under Sec. 79 permit the purchase of individual policies and cash value policies all within the aegis of "group term life insurance".

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...