Imputed income life insurance
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Employer-subsidized life insurance is a common perk of full-time and salaried jobs. Companies often use group term life insurance policies to fill this need. The IRS treats this as a tax-free benefit if the policy coverage is $50,000 or below. However, when these group life insurance policies have death payouts that exceed $50,000, there are important tax implications you’ll need to know about. Specifically, the IRS will treat amounts over that cutoff as taxable income. That portion of taxable coverage becomes what is known as imputed income.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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What is imputed income?
Generally speaking, imputed income includes the benefits an employee receives that are not part of their salary and wages. But these benefits are still taxed as part of an employee’s income. While the employee may not have to pay for these benefits and services, they might have to pay taxes on them, no matter the benefits’ monetary value. You might hear these referred to as fringe benefits with some companies.
It is important to understand the impact imputed income has on employees’ taxes. This amount needs to be included in an employee’s W-2. Without this information, the employee may end up underpaying on taxes if imputed income was not included.
The table below shows how the IRS breaks down the monthly taxable income cost per $1,000 of excess coverage. This is for coverage above and beyond the $50,000 death payout of term life insurance.
| Age of insured | Monthly taxable income cost per $1,000 of excess coverage |
|---|---|
| Under 25 | $0.05 |
| 25-29 | $0.06 |
| 30-34 | $0.08 |
| 35-39 | $0.09 |
| 40-44 | $0.10 |
| 45-49 | $0.15 |
| 50-54 | $0.23 |
| 55-59 | $0.43 |
| 60-64 | $0.66 |
| 65-69 | $1.27 |
| 70 and over | $2.06 |
Types of imputed income
There are several examples of imputed income an employer may offer. Examples might include:
- Group term life insurance with coverage in excess of $50,000 death benefit
- Use of a company vehicle
- Moving expenses reimbursement
- Dependent care assistance greater than $5,000 in value
- Education assistance higher than $5,250
- Adoption assistance if it exceeds a certain threshold
While these are examples of benefits that are considered imputed income, some popular benefits such as health insurance and health savings accounts do not fall into the category of taxable income.
How does imputed income work in life insurance?
The IRS considers the amount above a $50,000 group term life insurance death payout to be a form of imputed income. Because of this, there are tax implications for the employer and the taxable income must be reported. Employers include this information on employee W-2 forms as taxable wages. The IRS has created the table (located above) to show the tax cost based on the employee’s age.
How to calculate imputed income
Fortunately for employees, the imputed income from a group term life insurance policy exceeding $50,000 is relatively straightforward to calculate. The biggest factor an employee needs to understand is if the life insurance is considered a basic plan, where the employer pays the entire cost of the term life insurance. The policy could also be a voluntary life insurance plan, where the employee pays for part of the term life insurance policy. This would make a difference in how you calculate the amount.
Example with a basic life insurance plan
Consider a 54-year-old employee with $75,000 of life insurance coverage through a company-sponsored group life insurance life plan. First, we can ignore the initial $50,000, leaving us with $25,000 of taxable coverage. Next, per the IRS rules, we can divide that $25,000 by $1,000. Using the IRS table, we see that $0.23 per $1,000 is the tax rate owed by our 54-year-old employee. The result is 25 multiplied by $0.23, giving a monthly imputed income of $5.75.
- Excess coverage: $75,000 excess death benefit – $50,000 coverage = $25,000
- Monthly imputed income: ($25,000 / $1,000) x .23 = $5.75
- Annual imputed income: $5.75 x 12 months = $69 imputed income
At the close of the year, the employer would include $69 in this employee’s W-2 form as part of their taxable income.
The calculation is almost the same when you have a voluntary life insurance plan, where the employee pays premiums for the policy. The difference is that the amount the employee pays for premiums is added to the yearly imputed income.
Frequently asked questions
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Group term life insurance is typically a benefit offered by your employer, but there may be options for you to make additional purchases. When deciding if you should stay with the group term life insurance offered or seek an option elsewhere, it’s important to keep in mind a few key details. Check to see what the amount of the premiums will cost you (if anything) and if the policy is portable in case you leave the job. You should also confirm the death payout to determine if it would be enough to take care of your family’s needs should the unexpected happen.
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Yes, you do. Unless it is something considered exempt, the IRS requires fringe benefits, such as a group-term life insurance policy in excess of $50,000, to be considered taxable income. It will be subject to Social Security and Medicare taxes.
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Since imputed income is the value of the benefits provided by your employer that is considered taxable income, it will be reported in your gross wages. You may see a separate line in your paystub for imputed income.
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Imputed income refers to the value of the benefits provided by the employer. However, the employee is responsible for paying taxes on the imputed income. The imputed income is included in your gross wages by your employer.
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In general, life insurance payouts are not subject to income tax. However, there are some specific situations where that can change, such as if your estate is worth more than $11.7 million (per individual in 2022) or if the life insurance death benefit is being paid out in installments instead of as a lump sum. The first scenario is due to exceeding the IRS estate tax exemption value. In the second scenario, the death benefit itself is not taxable, but the interest earned on the death benefit is subject to taxes.
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