What Is Imputed Life Insurance Coverage?
Many employers provide life insurance coverage to their employees as a fringe benefit. Even though the employee receives no money directly -- nor will her family, as long as she lives -- the coverage itself has value and is therefore taxable as a form of income. Life insurance coverage treated as income for tax purposes is called "imputed income."
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Carried Coverage
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Life insurance coverage can be taxable as imputed income if it is part of a group policy covering at least 10 employees and the policy is "carried" either directly or indirectly by an employer. If the employer pays any or all of the cost of the insurance premiums, then it is carrying the policy directly. An employer is carrying a policy indirectly if it requires workers to pay the full cost of the premiums but it sets up the premiums so that some employees are subsidizing coverage for others.
For example, say a company offers life insurance to all employees for the same rate, regardless of their age or health. In such a case, younger and healthier employees will be paying more than they should, while older and sicker employees will be paying less. Coverage for those higher-risk employees is subsidized, so the policy qualifies as being indirectly carried by the employer.
Non-Carried Coverage
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If an employer simply makes coverage available for purchase by its workers, at premiums set by the insurer according to each employee's risk, then the coverage is not carried by the employer. None of the coverage will be treated as imputed income, and there are no tax consequences for the employees.
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Exemption
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Even in cases where the policy is carried by the employer, the first $50,000 of coverage for each employee is exempt. If a company were to provide each employee with life insurance coverage equal to a year's salary -- a common benefit -- then anyone making $50,000 or less would have no imputed income. Someone making $60,000 would have imputed income based on $10,000 worth of coverage, someone making $80,000 would have imputed income based on $30,000 worth of coverage, and so on.
Amounts
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The amount of imputed income for each employee is based on that worker's age and the amount of coverage above the $50,000 exemption. The figures are spelled out in a table included in IRS Publication 15-B, "Employer's Tax Guide to Fringe Benefits." For employees age 25 and younger, for example, every $1,000 of coverage over $50,000 produces 5 cents of imputed income per month. For employees 70 and over, every $1,000 of coverage over $50,000 produces $2.06 of imputed income per month. For people in between, the rates range from 6 cents to $1.27 per $1,000 per month.
Say a 40-year-old worker has $80,000 worth of coverage. After subtracting the exemption, his imputed income is based on $30,000 in coverage. According to the IRS table, people 40 to 44 years old have imputed income of 10 cents per $1,000 per month. So this worker would have $3 a month in imputed income.
Taxation
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Employers must include the imputed income from life insurance coverage when calculating how much to withhold from workers' pay for income taxes and Social Security and Medicare payroll taxes.
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