Expert: Shirley McAllister, CPP, PHR - 12/9/2008

Question
QUESTION: What portion of life insurance is taxable to the employee?

ANSWER: In the US it is anything over 50,000.00 paid for by the employer.

Shirley


---------- FOLLOW-UP ----------

QUESTION: Thank you for your quick response.  What formula is used?  I know age is a factor, what else?

Answer
It is different for different types of life insurance.

For Group-Term life insurance which is the most common type.

First of all the value of the excess coverage is subject to social security and medicare. The employer may withhold Federal income tax but is not required to do so, however, the employee must pay federal income tax on his tax return.

Age is the factor used to figure the amount taxable.

Per $1000 of excess benefit per month

Under age 25 it is .05
25-29          .06
30-34          .08
35-39          .09
40-44          .10
45-49          .15
50-54          .23
55-59          .43
60-64          .66
65-69          1.27
Age 70 and above   2.06

These are from 2007 rates, I do not have the 2008 in front of me. I don't believe they have changed much since last year. I didn't have any excess as we top out our life benefits at 50,000.

You have to determine the total amount of the insurance, calculate the benefit over 50,000, divide the excess by 1,000. Determine the employee's age as of Dec 31,the calendar year in which the benefit is taxable. Use the IRS table to calculate the fair market value of one month of excess insurance per 1,000.000 and multiply it by the answer obtained by dividing the excess amount by 1000.00.  Now deduct any after-tax contributions by the employee from the value of the insurance. Add the excess amount to the employee's income, withhold and pay social security and medicare taxes and Federal if requested by the employee and ok with the company, and report the amount as required by IRS.

If you are an employer there are discrimination tests with key employees to calculate and some exceptions to consider.

Whole life insurance and split dollar life insurance are calculated differently.

Shirley