Imputed income on Group Term Life Insur

[Guest Steve Miller]

I am unclear on the type of life insurance would be classified as group term. The problem I am having, is that we do not pay any premium (the employer) all premiums are paid by the employee. IRC Sec 79 has one paragraph that deals with coverage that can be taxable for employees paying all of the premiums. This is where I believe we fall and I need some clarification. Any help would be greatly appriciated. Thanks Steve

[Larry M]

The answer is "it depends"

If none of the employees has a benefit in excess of $50,000, there is no taxable income.

If the benefits exceed $50,000, then there is income attributable to the portion of the premium which pays for the benefit in excess of $50,000 if some employees pay less than the Table I costs and others pay more.

For example, if each of your employees pays an average rate of $ 0.40 per 1,000 of insurance per month, and the death benefits are in excess of $50,000, then all employees who are 50 and older are deemed to have an employer paid benefit for the portion in excess of $50,000.

[i am not an attorney, and this is a simplification of the answer.]

[This message has been edited by Larry M (edited 04-05-99).]

[Guest]

I don't think an employer has to worry about anything less than $50,000. And I also think that if the employee is paying for the insurance over $50,000, there's no problem, but I wonder if that's the cheapest rate the employee can get. See the regs. 1.79.

[Guest James J O'Connell]

I have been struggling with this one as well. If the employer sponsored basic coverage is up to $50,000 and the employee has voluntary options in addition to this coverage, is the excess subject to imputed income testing?

Do I, as the employer, have to make sure that the rate charged by us is equal to or greater than the IRS table as to life insurance rates? If our rates are higher than the IRS table, then there is no imputed income, correct?

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James J O'Connell

[JWK]

Larry M gave the right answer.

It is not accurate to state that all employee-pay-all group term life plans avoid imputed income. You have to ask more questions.

The issue is whether some employees pay more and some employees pay less than Table I rates. If all employees pay more than Table I rates, there's no imputed income. If all employees pay less than Table I rates, there's no imputed income if the policy is a separate policy that isn't subsidized by the employer and that is supported actuarially by premiums paid by employees. If some pay more and some pay less, those who pay less have imputed income equal to Table I rate for their age group minus the amount they actually pay (with after-tax dollars, of course) times their coverage amount. Those who pay more have no imputed income.

All this assumes the policy qualifies under section 79 and is not discrminatory.

[Guest HPK]

One thing I don't understand is, if your employer pays the life insurance premium that is not based on age, but it is as a flat amount, will the imputed income calculation be different? Will it calculate according to the flat rate they're paying or it will be age based according to the uniform premiums?

[jsb]

How about a comment on a real scenario.

Employer pays $15K basic for all employees. No tax problem.

Employer provides 1 option for employees to "buy up" coverage to 1x of salary with a limit of $50K (so the most any employee can buy is $35k of coverage; $50K-$15K=$35K). Employer pays this cost for some employees based on union contracts. (no tax issue here, it's $50K or less. Correct?) But for employees who pay, the rates are "split" at age 40, so under 40's pay $.18/thousand/month (higher than the table rate) and the 40-and-over group pays $.30/thousand/month, which stradles the table 1 rate. (40-54 under pay more than table 1 rates, and 55-and-over pay less than the table 1 rates)

Question: Is there an imputed income issue for the 55-and-over group, even though total coverage at this level is $50K or less??

Employer also provides a 2nd option of an additional 1x salary, limited to $50K, with rates tiered in 5 an 10 year bands. the premiums for every age band are greater than table 1, so no imputed income.

Appreciate any comments on this scenario, especially the question.