Determining ‘Cost’ of Coverage

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.

Example
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
$0.20)
($9.00)
Equals Employee’s Monthly Taxable Amount $0.20

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Your Best Resource for Section 79 Questions, Problems, Information

%d bloggers like this: