Imputed Income Life Insurance | Bankrate

Getting life insurance through work can be a great perk, but there’s a tax detail many people overlook. If your employer provides more than $50,000 in life insurance, the IRS considers the extra coverage taxable income — something called imputed income. This doesn’t mean you’re paying for the coverage, but it could bump up your tax bill slightly. The good news? Understanding how this works can help you avoid surprises and help you make more informed choices about your benefits.

What is imputed income?

Imputed income refers to non-cash benefits employees receive from their employer — things like company-paid life insurance, gym memberships or commuter benefits — that the IRS still considers taxable income. Even though you’re not paying for these perks out of pocket, they can increase your taxable earnings.

For life insurance specifically, if your employer provides more than $50,000 in coverage, the portion above that limit is considered imputed income and is subject to taxes. This doesn’t mean you’re paying for the insurance itself, but you might see a small tax increase because the IRS views the extra coverage as an added benefit.

Since imputed income affects how much tax you owe, it’s included on your W-2 form. If it’s left out, you could underpay taxes without realizing it.

The table below breaks down how the IRS calculates the monthly taxable cost per $1,000 of coverage beyond the $50,000 threshold, based on your age.

Note: Employer-provided life insurance is typically term life, which covers you for a set period. This differs from other private types of life insurance, such as whole life insurance, which includes a cash value component.

Types of imputed income

There are several examples of imputed income an employer may offer. Examples might include any taxable benefit that is not cash-related and is not part of an employee’s normal, taxable wages such as:

• 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
• Gym membership
• Achievement awards

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?

If your employer provides group term life insurance (GTL) coverage over $50,000, the IRS considers the cost of the excess amount as GTL imputed income. This means a portion of the cost of insurance treated as taxable wages and will appear on your W-2 form.

How to calculate imputed income

Calculating imputed income is relatively straightforward. The key factor is who pays for the policy:

• If your employer fully covers your group life insurance, the taxable portion is based on the IRS premium table and your age.
• If you pay part of the premium (as in a voluntary policy), the taxable amount is reduced based on your contribution.

The IRS table we referenced above helps determine the monthly taxable cost per $1,000 of coverage exceeding $50,000. Your employer will calculate this and include it in your taxable wages.

Example of a basic life insurance policy

Consider a 54-year-old employee with $75,000 of life insurance coverage through a company-sponsored group life insurance life policy. 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.

Imputed income can also apply if you have a voluntary life insurance policy, where the employee pays premiums for the policy. However, calculations differ based on the amount the employee pays for premiums impacts the yearly imputed income.

Example of a voluntary life insurance policy

Let’s look at how imputed income is calculated when an employee opts for supplemental voluntary life insurance coverage. The process follows the same steps as the basic employer-paid example, but the employee’s premium payments reduce the taxable portion.

For example, a 45-year-old employee has $50,000 in coverage paid for by their employer and opts to purchase an additional $50,000 in voluntary life insurance coverage, totaling $100,000. The first $50,000 is exempt, so only the remaining $50,000 is subject to imputed income calculations.

1.  Excess coverage: $100,000 total coverage – $50,000 exclusion = $50,000 taxable coverage
2.  IRS monthly rate for a 45-year-old: $0.15 per $1,000 of excess coverage
3.  Monthly imputed income: ($50,000 / $1,000) x $0.15 = $7.50
4.  Annual imputed income: $7.50 x 12 months = $90

However, if the employee contributes $5 per month toward their life insurance premium, this amount is deducted from the taxable imputed income:

1.  Adjusted monthly imputed income: $7.50 – $5 = $2.50
2.  Adjusted annual imputed income: $2.50 x 12 months = $30

In this case, the employee’s taxable imputed income for the year would be $30, which would be reflected on their W-2. Employees who contribute more toward their voluntary life insurance plan will see a lower taxable imputed income amount.

Frequently asked questions

• What is the best group-term life insurance?
  

  Group term life insurance is typically a benefit offered by your employer, but there may be options for you to make additional purchases. It’s often a good idea to accept whatever free coverage they’re offering. When deciding if you want to purchase additional group coverage, it’s important to keep in mind a few key details. Check to see what the premiums would cost, how much they are set to increase 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. If you have people relying on you financially, it’s a good idea to purchase your own individual life insurance policy separate from your employer.

• Do you have to pay taxes on imputed income?
  

  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.

• Is imputed income included on my paycheck?
  

  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.

• How do I avoid imputed income?
  

  Imputed income can be positive, as it includes the additional benefits an employee receives outside of their normal salary and wages. If you’re worried about the tax implications, you can reference the IRS chart to gauge what portion of your imputed income is considered taxable ahead of time to best prepare yourself financially.

• What are fringe benefits?
  

  Employees typically receive benefits and other types of compensation apart from the typical salary. These additions to your normal salary and wages are called fringe benefits. A few examples of fringe benefits include paid time off, health insurance, access to a company car for use, life insurance, childcare reimbursement, employee discounts and employee stock options.