When an employer provides more than $50,000 in group life insurance coverage under a plan for which employees contribute to premiums, the cost for coverage over $50,000 is considered imputed income. According to IRS regulations, the employer must include this cost in the employee's reported income for the year. However, any amount the employee pays toward the coverage on an after-tax basis may be deducted from the imputed income figure. Legislation regarding imputed income is defined in the Internal Revenue Code, Section 79.

Imputed income is not subject to federal income tax withholding. It is, however, subject to FICA tax, which an employer is required to withhold at least once a year and report on the employee's Form W-2. The cost of group term life insurance is calculated on a monthly basis and is defined in Table I, the "Uniform Premiums for $1,000 of Group Term Life Insurance Protection."

IRS Definition

1. Provides a general death benefit that is not included in income.
2. Is provided to a group of employees.
3. Is provided under a policy that the employer carries either directly or indirectly.
4. Amount of insurance provided to each employee is computed under a formula that precludes individual selection.

Employer-provided Coverage

An employer is considered to have provided the coverage "directly or indirectly" if:

1. The employer pays any part of the cost of the life insurance coverage, OR
2. The employer arranges for its employees to pay the cost of the coverage (e.g., payroll deduction) and charges at least one employee less than the Table I cost of the insurance and at least one other employee more than the cost of the insurance.

Special rules for key employees

A group term life plan cannot discriminate in favor of key employees as to the type or amount of benefits available or eligibility to participate. If the plan discriminates in favor of key employees, all key employees lose the benefit of the $50,000 exclusion under Section 79 of the Internal Revenue Code, and imputed income is based on the greater of the Table I cost and the actual cost. Section 79 provides certain safe-harbor rules that will ensure a nondiscriminatory plan, if the rules are met. In addition, even if the plan discriminates in favor of key employees, other (i.e., non-key) employees continue to qualify for the $50,000 exclusion under Section 79.

Contact your Employee Benefits Sales and Service representative at The Standard for additional information or assistance in determining if you must calculate imputed income withholding.

Additional Resources

For more information on imputed income, consult the following:

• Federal Register Vol. 64, No. 106, Thursday, June 3, 1999 ("Internal Revenue Service - RULES")
• Internal Revenue Bulletin, Bulletin No, 1999-25 Weekly, June 21, 1999