Employer provided Life Insurance

[Guest Sam Trager]

My company has proposed providing life insurance at a rate of 2 times annual salary. (Presently, we only provide 20k.) I understand that the benefit above $50,000 is taxable. In order to calculate the taxable amount for W2s, can we use the actual premium or do we need to use the age based IRS table? Thanks.

[papogi]

Employees should be taxed on the greater of the premium or IRS Table I rates for the amount that exceed $50,000.

[Ron Snyder]

Employees are taxed on the Table I rates, not on the greater of the Table I or current premiums. However, you should make sure that other rules under the Regulations under Section 79 are also complied with (relative to nondiscrimination, underwriting, etc.).

[papogi]

Does IRS Notice 89-110 not apply since this is entirely employer paid? Then they have to use Table I? I know that employee amounts over $50,000 are taxed at the employee's premium or Table I, whichever is greater.

[Ron Snyder]

IRS Notice 89-110 (in the part applicable) deals with dependent group coverage, not employee group coverage. This was primarily for determining how much income was imputed to the employee group term life insurance on his or her spouse or dependents and did not alter the group term life insurance provisions under IRC section 79. It provides that $2,000 or less of dependent coverage (typically under a health plan) is not taxable and the excess is taxed only to the extent it is funded by the employer and not by the employee's after tax contributions.

[papogi]

What I was pointing to is the last line of the notice, which deals directly with employee life insurance. "As is true of employer-provided group term life insurance on the life of the employee in excess of the dollar limit of section 79 that is offered under a cafeteria plan, the total amount includable in the gross income of an employee who receives such insurance under a cafeteria plan is the greater of the employee's contributions toward the purchase of the insurance or the cost (determined under section 1.79-3(d)(2) of the regulations) of the insurance." It's the part where it says, "As is true of employer-provided group term life insurance on the life of the employee..." that is getting me. My thinking after reading your post is that since it is employer-provided, there is no cost to the employee, so they must be taxed using Table I.

[Ron Snyder]

That sentence applies to group term life insurance arrangement within a cafeteria plan and specifies that the greater of the employee's contribution (not the employer's share of premiums) or the Table I amount is imputed to the employee as taxable for the year.

[papogi]

Understood. Makes sense. Thanks.