Does the actual cost of group term life coverage matter when determining the amount of imputed income?
No. If the aggregate death benefit payable on all employer-provided group term life insurance (GTLI) during a period of coverage (usually one month) exceeds $50,000, the actual cost of the coverage does not matter when calculating the imputed income amount. If the coverage exceeds $50,000, then the imputed income amount is determined using the IRS Table I rates.
As background, generally the cost of employer-provided GTLI is included in an employee's gross income. However, IRC Section 79 provides that an employee may exclude the cost of up to $50,000 of employer-provided GTLI coverage from income on his or her own life. The exclusion applies only to insurance on the life of the employee, and not on the life of a spouse, dependent or any other person.
Importantly, the exclusion is determined on a calendar-month basis. So, for purposes of determining the employee's own tax liability, all employer-provided GTLI provided during a month is considered when applying the $50,000 limit.
If the employee receives more than $50,000 of employer-provided GTLI coverage for a period of coverage (a calendar month), then the cost of the insurance in excess of $50,000, less any amount paid by the employee with after-tax contributions, is included in the employee's gross income for both federal income tax and FICA purposes. The included amount as a result of the excess coverage is commonly referred to as "imputed income."
The cost of GTLI coverage taken into account in determining an employee's imputed income is determined using a uniform table of life insurance rates outlined in IRS regulations, commonly known as the "Table I rates." Table I establishes gradually increasing rates based on age, which are generally structured in five-year age brackets. For purposes of the table, an employee's age is determined by his or her age at the end of the taxable year.
For example, if an employee receives $250,000 in coverage from the employer-paid group term life coverage, then $200,000 of excess coverage (250,000-50,000=200,000) must be counted in the employee's gross income using the rates from Table I. If the employee is age 60, then the employer would first calculate .66 (Table I rate for insured age 60) per $1,000 of excess coverage (200 x .66 = 132), then by number of coverage months (132 x 12 = $1,584).
Any additional spouse/dependent coverage (let's say $20,000 of dependent coverage) from the employer-paid GTLI must be counted in the employee's gross income using the rates from Table I. If the spouse is age 39, the employer would calculate .09 (Table I rate for insured age 39) per $1,000 of coverage (20 x .09 = 1.80), then multiply by number of coverage months (1.80 x 12 = $21.60).
So, to be clear, the requirement to impute income for the spouse/dependent GTLI is independent of the employee's GTLI amount. All employer-sponsored spouse/dependent GTLI is imputed income to the employee. As another example, the employee could have $40,000 in GTLI and $20,000 on his/her spouse/dependent. The employee's GTLI amount would not need to be imputed because it is under $50,000, but the $20,000 in spouse/dependent GTLI would need to be added to the employee's gross income (again, since it is employer-paid GTLI).
After determining the cost of coverage through the Table I rate, the aggregate cost of the coverage for the employee's taxable year is reduced by the amount, if any, that the employee paid toward the purchase of all employer-provided GTLI. Employee payments toward the purchase of such coverage do not include amounts contributed by pre-tax salary reduction under a cafeteria plan, amounts paid for non-employer-provided GTLI coverage or amounts paid for GTLI coverage during a different taxable year. In other words, the Table I aggregate cost of coverage may only be reduced by after-tax employee contributions; employer contributions and employee pre-tax contributions do not reduce the aggregate cost.
Although an employee's imputed income for GTLI is not subject to income tax withholding, employers must report the income and must withhold FICA taxes on it. Employers are responsible for determining imputed income only for that employer's GTLI coverage; employers are not required to take into account coverage provided by an unrelated employer.
In addition, there is a "de minimis" amount for dependent coverage. In other words, if the face value of the dependent coverage is $2,000 or less, then it isn't includable in the employee's taxable income (see page 9 of Publication 15-B). For example, if the employer-provided spouse/dependent GTLI is $20,000, this would not fall under the de minimis amount allowed for dependent coverage.
Therefore, employers should review their GTLI benefit plan offerings, and determine whether the employee coverage exceeds $50,000. If so, then the employer will have to determine the aggregate cost of coverage that exceeds $50,000, and that cost must be included in the employee's gross income as imputed income. Any spouse/dependent amounts (assuming they exceed the de minimis amount) would generally be counted as taxable income to the employee subject to federal withholding (although imputed income for employee's group coverage would not be subject to federal withholding). The employer will need to consult the Table I rates to make that determination based upon the insured's age, and engaging outside tax counsel or an accountant may be necessary in some instances.