Preparation of 1099 for "current economic benefit" of life insurance coverage

[SteveH]

I'm confused on how to go about calculating the current economic benefit amount for his 1099. Hopefully someone can point me to a resource. We have one client this year that has an insurance policy with a face amount of $250,000. He is 53 years old. Now we are having this huge office discussion on what value he gets a 1099 for and it seems everyone has a different opinion.

I thought it was simply multiplying the table 2001 rate for a 53 year old which is $3.20 by 250, which would equal $800.

Someone else in my office brought up the fact that the first $50,000 face amount in a qualified plan is "free". So his calculation would be $3.20 times 200 = $640.

Now another person brought up the fact that she thinks you have to subtract the cash value of the policy from the face amount prior to calculating. I don't know what the cash value is at this time, but let's just say it is $20,000. So her calculation is $736. She says she has never heard about the first $50,000 of face amount being "free".

Now I am wondering if they are both right and the calculation is actualy 250 - 50 - 20 times 3.20 = $576.

I do recall at a flexible spending account seminar someone mentioning something about $50,000 of life insurance but I don't remember what exactly they were referrign to. Also the argument about the cash value of the policy having to be subtracted because he the client is being taxed on the pure insurance benefit seems to be a logical argument.

It all adds up to me being really confused and not sure where to go next to find out how much the client's 1099 should actually be. I'm considering calling the IRS and asking them. Any thoughts?

[JanetM]

Are asking how much income to impute for the $250K of company paid life insurance? The imputed income is on the premiums paid by employer for any insured amounts over $50K.

[SteveH]

I am asking how to calculate the PS-58 costs for the life insurance that is an asset in a profit sharing plan. Sorry I wasn't clear on that.

I didn't use the phrase PS-58 since everything i have read says that after 2002 you can not use PS-58 rates anymore and you have to use the Table 2001 rates.

Doing more research around this board, I am beginning to think that the guy in my office that said the first $50,000 was "free" only applies to Cafeteria Plans and that you would still pay the applicable current economic benefit cost. I think he was confused on the imputed wage for premiums over $50,000 of insurance coverage.

Basically this guy has a life insurance policy inside a profit sharing plan. He needs to pay some sort of current tax on that so that in case he did actually die the benefit paid to him would not be taxable. I am trying to figure out what the correct method is to calculate that amount.

[JanetM]

I would say only the premiums paid are used to impute income to him. But that brings up another interesting point, profit sharing contributions are tax deferred for the participant until they come out of the plan. So this can't be seen as ER or EE pre tax contribution. Is there a 401K to this profit sharing? Why not consider that the premiums paid are paid with after tax contributions.

This actually sounds like a terrible plan, almost like tax evaision. Large Tax free distributions from PS plan when you only recognized a very small amount of income.

[SteveH]

No, no income needs to be imputed to him at all. We are confusing Cafeteria Plan issues with life Inusrance in a profit sharing plan.

Imagine a client with a $400,000 profit sharing contribuiton plan balance. The contribution for 2005 was zero. He took $20,000 of his existing balance and purchased a life insurance policy. Imagine a self directed plan in which the participant buys antiques or shares in a limited partnership or anything else for that matter. The only difference is that he has invested a portion of his balance in a life insurance policy.

The IRS has said that if you have insurance in the plan, then there is a current benefit for the life insurance coverage you have had for the year and you must pay taxes for that current benefit. The way that I understand it, it works out to basically be the cost for term insurance coverage for one year. So if $250,000 of term insurance for a 53 year old is $1,000, then he would receive a 1099 for $1,000 and he would pay the applicable personal tax rate on that $1,000.

What I am trying to do is calculate that $1,000.

It's not like tax evasion or anything else. There are a lot of code sections that talk about it, I just haven't found anything explaining how I calculate it. Chances are he probably won't die and the policy will be cashed in when he quits working. Then he will pay taxes on the full distribution.

I saw a few references when I do a serch on the board for life insurance to a Sec. 79. I don't know what that is, or where to find it yet, but I am going to go try and find it and see if it helps.

[Guest mjb]

See tax facts on life insurance Q 411-412

[Bird]

We usually ask the insurance company for this information and use what they give us. Having said that, the calculation is (face amount - cash value [i.e. "at risk" portion of policy]) X table 2001 rate.

There is no adjustment for the first $50,000. There is no tax evasion; this simply reflects the fact that the participant is receiving a current economic benefit from the plan...as if he had pulled out enough to buy a term policy outside the plan.

[Tom Poje]

the table can be found here and in a gazillion other places I am sure.

http://www.lawrenceassociates.com/Files/Splitnot01-10.pdf

[Kirk Maldonado]

The applicable rules are found in Treasury Regulation Section 1.72-16.

[SteveH]

thank you everyone.