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Are you sure the employee purchased group term life doesn’t require imputed income? Two very large employers I worked at calculated imputed income on the life plans the employee elected to enroll in and their coverage was over $50000. 

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37 minutes ago, LUCY said:

Are you sure the employee purchased group term life doesn’t require imputed income? Two very large employers I worked at calculated imputed income on the life plans the employee elected to enroll in and their coverage was over $50000. 

I agree.  I believe there would be imputed income on employee paid life that is provided by the employer.

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Interesting. That hasn't been my experience, nor was it at my prior large employer. Maybe we are talking about different "plans" or situations?

I'm referring to a situation where the employer provides free group term life up to $50,000. Then, voluntarily, you can elect to PURCHASE, and pay the premium for, additional group term life up to a maximum of, say, 5x your salary. So if you make $60,000, you can purchase up to $300,000 in group term life. The premium is deducted from your paycheck on an after-tax basis.

Are you saying that in this situation, where you are paying the premium with after-tax dollars already, that you are also taxed on imputed income? If so, could you please provide some citation or proof that this is the appropriate treatment?

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Maybe it is me but Lucy's question and follow up comment is vague on an important point.   In both comments it isn't clear who is paying.  In comment one she says "offers" and she talks about who gets to elect but never discusses who pays.  

Who is paying for the coverage over $50k? 

I have worked for employers that paid for life insurance coverage that was 2x my salary and I paid nothing for that coverage.  I had taxable income on the part of the coverage that exceeded $50k and that is my understanding how it ought to go.  On the other hand if the employee pays it isn't taxable.

 

Full disclosure this is a benefit area that I am  NOT an expert in.  I am a simple CPA and what I learned about this was because of my own taxes and that is what I am basing my comment on. 

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I agree with ESOP Guy, little vague.  Here is the IRS wording, at Group Term Life Insurance.  

Total Amount of Coverage

IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.

Carried Directly or Indirectly by the Employer

A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if:

  1. The employer pays any cost of the life insurance, or
  2. The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (the “straddle” rule).

The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost. You can view the Premium Table in the group-term life insurance discussion in Publication 15-B.

Because the employer is affecting the premium cost through its subsidizing and/or redistributing role, there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged. You must calculate the taxable portion of the premiums for coverage that exceeds $50,000.

Not Carried Directly or Indirectly by the Employer

A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee. Because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements.

Example 1 - All employees for Employer X are in the 40 to 44 year age group. According to the IRS Premium Table, the cost per thousand is .10. The employer pays the full cost of the insurance. If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000.

Example 2 - The facts are the same as Example 1, except all employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. Therefore there is no taxable income to the employees. It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees.

Coverage Provided by More Than One Insurer

Generally, if there is more than one policy from the same insurer providing coverage to employees, a combined test is used to determine whether it is carried directly or indirectly by the employer. However, the Regulations provide exceptions that allow the policies to be tested separately if the costs and coverage can be clearly allocated between the two policies. See Regulation 1.79 for more information.

If coverage is provided by more than one insurer, each policy must be tested separately to determine whether it is carried directly or indirectly by the employer.

Coverage for Spouse and Dependents

The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.

Whether a benefit provided is considered de minimis depends on all the facts and circumstances. In some cases, an amount greater than $2,000 of coverage could be considered a de minimis benefit. See Notice 89-110 for more information.

If part of the coverage for a spouse or dependents is taxable, the same Premium Table is used as for the employee. The entire amount is taxable, not just the amount that exceeds $2,000.

Example 3 -  A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly by her employer. She is also entitled to $100,000 of optional insurance at her own expense. This amount is also considered carried by the employer. The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income. If the optional policy were not considered carried by the employer, none of the $100,000 coverage would be

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We used to call them PS58 costs.  Dreaded the year end when we had to issue 1099s for PS58 costs.  It got really complicated.  Actual cost vs cheapest published premiums vs IRS Table rates.  I was working in an insurance agency and the agents hated this.   Somewhere in the distant future, these costs are supposed to be recouped.

I'm too far out of the game to remember the details.

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On 3/5/2020 at 11:01 AM, leevena said:

I agree with ESOP Guy, little vague.  Here is the IRS wording, at Group Term Life Insurance.  

Total Amount of Coverage

IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.

Carried Directly or Indirectly by the Employer

A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if:

  1. The employer pays any cost of the life insurance, or
  2. The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (the “straddle” rule).

The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost. You can view the Premium Table in the group-term life insurance discussion in Publication 15-B.

Because the employer is affecting the premium cost through its subsidizing and/or redistributing role, there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged. You must calculate the taxable portion of the premiums for coverage that exceeds $50,000.

Not Carried Directly or Indirectly by the Employer

A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee. Because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements.

Example 1 - All employees for Employer X are in the 40 to 44 year age group. According to the IRS Premium Table, the cost per thousand is .10. The employer pays the full cost of the insurance. If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000.

Example 2 - The facts are the same as Example 1, except all employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. Therefore there is no taxable income to the employees. It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees.

Coverage Provided by More Than One Insurer

Generally, if there is more than one policy from the same insurer providing coverage to employees, a combined test is used to determine whether it is carried directly or indirectly by the employer. However, the Regulations provide exceptions that allow the policies to be tested separately if the costs and coverage can be clearly allocated between the two policies. See Regulation 1.79 for more information.

If coverage is provided by more than one insurer, each policy must be tested separately to determine whether it is carried directly or indirectly by the employer.

Coverage for Spouse and Dependents

The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.

Whether a benefit provided is considered de minimis depends on all the facts and circumstances. In some cases, an amount greater than $2,000 of coverage could be considered a de minimis benefit. See Notice 89-110 for more information.

If part of the coverage for a spouse or dependents is taxable, the same Premium Table is used as for the employee. The entire amount is taxable, not just the amount that exceeds $2,000.

Example 3 -  A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly by her employer. She is also entitled to $100,000 of optional insurance at her own expense. This amount is also considered carried by the employer. The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income. If the optional policy were not considered carried by the employer, none of the $100,000 coverage would be

Example 3 answers my questions. There are two policies. One is employer paid and one is employee paid. Both plans are carried directly by the employer and the the employer has reporting requirements. Imputed income applies for amounts over $50,000.    

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