A refresher on imputed income from life insurance

With open benefits enrollment a rite of fall for many companies, employees will again have good reason to contemplate their levels of life insurance coverage. Employees of all ages -- especially those with family obligations – should be cognizant of the life insurance options available through their jobs. Furthermore, companies should be walking through these coverage opportunities with their employees.

However, employees also must be aware of the prospect of having to pay taxes on group-term life insurance policies of $50,000 or more, per Internal Revenue Service rules. The value in excess of $50,000 is considered imputed income and must be listed on a taxpayer's W-2.

If an employer contributes to a policy worth $50,000 or more, or if the premium of one employee subsidizes the premium of another employee, imputed income must be declared by the employee on the excess beyond $50,000.

The easiest way to see how this works is through example. Let's suppose a 42-year-old executive carries $400,000 in life insurance from her company.

To calculate the imputed income, the following steps are taken:

1. Find the sum of the policy less $50,000. In this case, our answer is $350,000.

2. Divide this figure ($350,000) by 1,000. This leaves us with 350.

3. Multiply the amount in Step Two (350) by the number of months covered in the tax year. In this case, we'll assume full-year coverage, so the number of months is 12. Multiplying 350 by 12 gives us 4,200.

4. Multiply the figure from Step Three (4200) by the corresponding age band value provided by the IRS. In this case, the cost per coverage over $50,000 is $0.10. Multiplying 4200 by .10 gives us 420.

5. Finally, we take the number in Step 4 (420) and subtract the employee's annual insurance contribution, which we'll set at $240. Once we subtract 420 by 240, we're left with $180 in imputed income.

Whatever the situation may be, the point is that employers and employees need to be aware of the tax ramifications resulting from imputed income. No one likes surprises on their W-2s. However, imputed income could be considered by some as a small price to pay for having suitable life insurance coverage.

If you would like more information on imputed income, or have any other insurance questions, contact your Plexus client representative directly, or reach out to us at 847-307-6100 (Deer Park), 312-606-4800 (Chicago), 972-770-5010 (Dallas) or 405-840-3033 (Oklahoma). You can also contact us via the Web.