Expert: Shirley McAllister, CPP, PHR - 10/9/2009

Question
Hi Shirley,

I have a quick question for you.  I have emailed you before, but I'll recap.  I've taken over our US Companies payroll and I run it from Canada.  

They have a taxable benefit called GTL which I am assuming is Group Term Life?   I understand that it is a taxable benefit and that there is a calculation for this where it is only taxable on insurance over $50K.  

Can I ask how the taxable benefit is calculated - the amount that would be added to an employees payroll?  Do you use the rate the insurance company charges to make this calculation?

Thanks for you assistance.

Kelly

Answer
First you have the IRS Table 1-Uniform Premiums (Fair market value of GTL Insurance per 1,000 of excess benefit Per Month)

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

Here are the steps an employer must take in computing the monthly value of excess group term life insurance to include in an employee's income.
 1. Determine the total amount of the employee's group-term insurance coverage under the employer's plan (including coverage purchased by both the employer and the employee). Most plans figure coverage as a multiple of the employee's base salary, which may increase during the year if the emloyee gets a raise. That is why many employers use the employee's base salary as of January 1 of each year as the base amount for determining life insurance coverage. Many companies also have a maximum amount of employer provided coverage.
  2. Calculate the excess benefit over 50,000.00
  3. Divide the excess insurance amount by 1,000.00
  4. Determine the employee's age as of December 31 of the calendar year during which the benefit is taxable.
  5. Use IRS Table 1 to calculate the fair market value of one month of excess insurance per 1,000 and multiply it by the answer obtained from step 3.
  6. Deduct any after-tax contributions by the employee from the value of the insurance.
  7. Add the excess amount to the employee's income, withhold and pay social security and medicare taxes, and report the amount as required.

Example: Valerie was born April 23, 1951. Her employer's non discriminatroy group-term life insurance plan provides her with coverage equal to  2X her annual salary as of January 1, and her salary as of 1-1-09 was 65,000.00.  Her employer's plan has a maximum coverage amount of 125,000.00. Valerie contributes 25.00 per month in after-tax dollars toward the insurance premiums.

Step 1: 2 X 65,000 = 130,000
       Maximum coverage amount = 125,000
       Valerie's coverage = 125,000

Step 2:  125,000-50,000=75,000

Step 3:  75,000 divided by 1,000 = 75

Step 4:  Valerie will be 58 years old on 12-31-09

Step 5:  .43 X 75 - 32.25

Step 6: 32.25 - 25.00 =7.25 per month of taxable income in 2009.

If Valerie did not pay anything for the group term life insurance, or paid with only pre tax dollars the entire 32.25 would be included in her income each month.

Shirley