To calculate the monthly cost of insurance amounts over $50,000, multiply the applicable Table I rate by the number of $1,000 increments of coverage in excess of $50,000. If this cost exceeds any amount paid on an after-tax basis by the employee for the
coverage, the difference is included in an employee’s gross income. This means that even employees who contribute the full premium charged by the insurer may have to pay tax on any amount by which the Table I cost of coverage over $50,000 exceeds the premium
charged by the insurer. This result may be avoided in some cases based on the relationship among multiple policies and the premiums under those policies.
Imputing Income on Employee-Paid Coverage
As noted previously, if an employee’s after-tax payments for life insurance are less than the full Table I cost of the employee’s employer-carried coverage exceeding $50,000, the employee generally will have tax liability on the difference. Under a
nondiscriminatory group-term life insurance plan that provides over $50,000 of coverage on an employee, the included cost equals the Table I rate for coverage exceeding $50,000, reduced by any after-tax employee contributions made for the entire coverage amount. Under this formula, an employee may have tax liability on coverage for which the employee pays the full premium charged by the insurer because the applicable Table I rate may be higher than the insurer’s rate.
|ABC Company provides Ms. X with group-term life insurance equal to two-times her base salary of
$45,000. ABC pays the premium for the first $45,000 of coverage and Ms. X pays on an after-tax basis $.20 per $1,000 of coverage per month (the full premium charged by the insurer) for her coverage over $45,000. Ms. X is 51 years old.
|Total Coverage Amount ($45,000 x 2)||$90,000|
|Less $50,000 Exclusion||$50,000|
|Equals Coverage over $50,000||$40,000|
|Monthly Cost of Coverage over $50,000 Table 1 Rate (40,000 ÷ $1,000 x $0.23)||$9.20|
|Less Employee’s Monthly Contribution (40,000 ÷ $1,000 x
|Equals Employee’s Monthly Taxable Amount||$0.20|