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Imputed income is the value of the income tax the Internal Revenue Service (IRS) puts on group-term life insurance coverage in excess of $50,000. In other words, when the value of the premiums paid for by employers becomes too great, it must be treated as ordinary income for tax purposes.
How does imputed income work?
The IRS considers group-term life insurance provided by your employer to be a tax-free benefit so long as the policy's death benefit is less than $50,000. Therefore, there are no tax consequences if your group-term policy does not exceed $50,000 in coverage. However, there are tax implications if an employee is provided over $50,000 in life insurance coverage and pays less in premiums than the IRS has deemed the policy to be worth. In this situation, the value of the life insurance policy in excess of what an employee pays in premiums is referred to as imputed income — which is subject to income taxes.
For example, say you have a group life insurance policy that has $100,000 in coverage, and your employer pays the premiums for the insurance. Since the death benefit of the plan exceeds $50,000, the life insurance would be subject to imputed income. This is calculated by your employer using an IRS imputed income table and then reported on your W-2 tax form.
Why does imputed income matter?
Imputed income is important to recognize since it is a fringe benefit. These are benefits — such as services, goods or experiences — provided by an employer that are in addition to your regular income. In the case of group-term life insurance, the IRS states that life insurance premiums for a policy of more than $50,000 are a fringe benefit and create a taxable income for the employee.
As an employer, imputed income life insurance is important to note since this information must be included in your employees' W-2 tax forms. If it is not reported, then you will be undervaluing the amount of taxes your employees must pay.
IRS imputed income premium table
Under the IRS tax laws, you are required to pay income taxes on the premiums your employer pays if the value of your company life insurance is in excess of $50,000. The imputed income value is determined by your age and the IRS schedule below.
|Age||Monthly cost per $1,000 in coverage|
|Under age 25||$0.05|
|25 to 29||$0.06|
|30 to 34||$0.08|
|35 to 39||$0.09|
|40 to 44||$0.10|
|45 to 49||$0.15|
|50 to 54||$0.23|
|55 to 59||$0.43|
|60 to 64||$0.66|
|65 to 69||$1.27|
|70 and over||$2.06|
Once the imputed income value of the life insurance more than $50,000 has been calculated, this tax liability will be added by the employer to the W-2 tax form at the end of the year.
Calculating imputed income
How to calculate imputed income will vary depending on if you have a basic or voluntary life insurance policy with your employer. The main difference is that basic group life insurance is paid for entirely by the employer versus voluntary life insurance is paid partially by the employee. Therefore, each example below is slightly different depending on which type of plan you have.
Example 1: Basic life insurance
An employee has a basic life insurance policy with his company that has a death benefit of $150,000, which is paid entirely by his employer. The employee is currently 47 years old. Using the IRS table, this employee would fall into the 45 to 49-year-old range and incur a cost of 15 cents per $1,000 in coverage.
Excess coverage = $150,000 - $50,000 = $100,000
Monthly imputed income = ($100,000 / $1,000) x .15 = $15
Yearly imputed income = $15 x 12 = $180
The employer would then include $180 in the employee’s W-2 form at the end of the year.
Example 2: Voluntary life insurance
An employee pays $150 per year for a voluntary life insurance policy with his company that has a death benefit of $250,000. The employee is currently 47 years old. Using the IRS table, this employee would fall into the 45-to 49-year-old range and incur a cost of 15 cents per $1,000 in coverage.
Excess coverage = $250,000 - $50,000 = $200,000
Monthly imputed income = ($200,000 / $1,000) x .15 = $30
Yearly imputed income = $30 x 12 = $360 - $150 (what the employee pays in premiums) = $210