What Is Imputed Income for Group-Term Life Insurance?
The value of the income tax levied by the Internal Revenue Service (IRS) on group-term life insurance coverage in excess of $50,000 is known as imputed income. In other words, when the value of employer-paid premiums exceeds a certain threshold, it must be considered as ordinary income for tax reasons.
How does imputed income work?
So long as the policy's death benefit is less than $50,000, the IRS considers group-term life insurance given by your company to be a tax-free benefit. As a result, if your group-term policy does not exceed $50,000 in coverage, there are no tax implications.
However, there are tax consequences if an employee receives more than $50,000 in life insurance coverage and pays less in premiums than the IRS has determined the policy is worth. In this case, the value of the life insurance policy in excess of what an employee pays in premiums is referred to as imputed income, and it is taxable.
- For example, suppose you have a group life insurance policy with $100,000 in coverage and your business pays the premiums. Because the plan's death benefit exceeds $50,000, the life insurance would be subject to imputed income. Your employer computes this using an IRS imputed income table and reports it on your W-2 tax form.
Why does imputed income matter?
Imputed income is crucial to recognize since it provides a supplemental advantage. These are perks supplied by an employer in addition to your normal salary, such as services, commodities, or experiences. The IRS maintains that life insurance premiums for a policy of more than $50,000 are a fringe benefit and constitute taxable income for the employee in the case of group-term life insurance.
As an employer, you should be aware of imputed income life insurance because this information must be disclosed on your employees' W-2 tax forms. If it is not disclosed, you will underestimate the amount of taxes that your employees must pay.
IRS imputed income premium table
If the value of your company life insurance exceeds $50,000, you must pay income taxes on the premiums paid by your employer, according to IRS tax laws. Your age and the IRS schedule below determine the imputed income value.
Age | Monthly cost per $1,000 in coverage |
Under age 25 | $0.05 |
25 to 29 | $0.06 |
30 to 34 | $0.08 |
35 to 39 | $0.09 |
40 to 44 | $0.10 |
45 to 49 | $0.15 |
50 to 54 | $0.23 |
55 to 59 | $0.43 |
60 to 64 | $0.66 |
65 to 69 | $1.27 |
70 and over | $2.06 |
Once the imputed income value of the life insurance greater than $50,000 has been calculated, the employer will add this tax burden to the W-2 tax form at the end of the year.
Calculating imputed income
The method for calculating imputed income will differ based on whether you have a basic or voluntary life insurance policy via your employer. The key distinction is that basic group life insurance is totally paid for by the employer, whereas voluntary life insurance is partially paid for by the employee.
Example 1: Standard life insurance
An employee has a basic life insurance policy with his company with a death benefit of $150,000 that is fully paid for by his employer. The employee is now 47 years old. According to the IRS chart, this employee would be 45 to 49 years old and would pay 15 cents for $1,000 in coverage.
- Excess coverage = $150,000 - $50,000 = $100,000
- Imputed monthly income = ($100,000 / $1,000) x.15 = $15
- Yearly imputed income = $15 x 12 = $180
- At the end of the year, the company would include $180 in the employee's W-2 form.
Example 2: Voluntary life insurance
An employee pays $150 per year for a $250,00 death benefit optional life insurance policy with his firm. The employee is now 47 years old. According to the IRS chart, this employee would be 45 to 49 years old and would pay 15 cents for $1,000 in coverage.
- Excess coverage = $250,000 - $50,000 = $200,000
- Imputed monthly income = ($200,000 / $1,000) x.15 = $30
- Yearly imputed income = $30 x 12 = $360 - $150 (premiums paid by the employee) = $210.