Question of the Week
Q. Is voluntary life insurance subject to imputed income rules?
A. Most folks know that employer-paid life insurance in excess of $50,000 is subject to imputed income rules, but many are surprised to learn that employee-paid voluntary life is also subject to the rules, depending on how the rates fall in comparison to the Table 1 rates. From the IRS site:
"Total Amount of Coverage
IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.
Carried Directly or Indirectly by the Employer
A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if:
- The employer pays any cost of the life insurance, or
- The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (the “straddle” rule).
The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.
Because the employer is affecting the premium cost through its subsidizing and/or redistributing role, there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged. You must calculate the taxable portion of the premiums for coverage that exceeds $50,000."
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DISCLAIMER: Information on this site is not intended to be, nor should it be considered legal or tax advice. Every situation is different and you should seek professional guidance regarding your specific situation.