Calculating the Tax Consequences of Discriminatory Policies

If an employer-provided group term life plan favors key employees, calculating their imputed income is different in two ways:

1. Key employees do not get the $50,000 benefit exemption; the employer must calculate imputed income based on the full amount of their life insurance coverage.
2. Employers must use the greater of Table I rates or the actual rate the insurer charges when you calculate imputed income.

Unfortunately, the IRS does not clearly define the term ‘actual rate’. In general, an employer should not use the composite rate charged for a thousand dollars of life coverage. To determine a composite
rate, the insurance carrier melds age-banded rates representing employee demographics. Employers will need to ask their life insurance insurer for the actual cost (or age banded rates) for key employees. It could be argued that the actual cost can also take into
account any effective discounts the carrier has applied to the composite rate. For example, if the insurer took a 15% discount off the composite rate during the quoting process, one could take that discount off the key employee age rate before determining the actual cost for imputed income purposes. Additional imputed income needs to be assessed on key employees only when the life plan is considered discriminatory.

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