Expert: Vanessa D. Powell, CPA - 12/14/2009

Question
Hi Vanessa,

I have a question on the fringe benefit of Group Term Life insurance.  Unfortunately, when I calculated the Group Term Life Insurance fringe benefit correctly using the IRS table 1 it varied greatly from what my predecessor calculated at the beginning of the year when setting up the fringe benefits within our payroll system.  I have no idea what calculation she used, but for some employees the differential still owing are quite high.

One employee in particular has a correctly calculated GTL fringe benefit $ value of $2,880.36 for the year, BUT only $891.53 has to date been added to his income as a fringe benefit.  I need to notify him and add the additional amount of $1,988.83 to his income on his last pay of the year as a fringe benefit.  My question is less a question and more the seeking of advice in writing an email to him notifying him of this issue.  He is a remote worker or I would speak to him in person.  

1)   Is there any legal issue with adding this amount to his income all at once?  This will also impact any terminated employees in 2009; I would have to make adjustments to their W-2’s for these amounts.
2)   Could I ask your advice on how to word this email to these employees individually?  To be honest I feel awful as this is not a small error on my predecessor’s part..  

Any advice would be most helpful.
Kelly


Answer
Hi Kelly-

First of all, let me say that I don't envy your position.  I've been there myself, and not only is it incredibly frustrating, but it also stinks that you have to be the one to bear the bad news.

I'm assuming when you ask whether or not it's legal to add the amount to his income that you mean for tax purposes.  You won't actually be adding anything to his income, but you'll need to tax him as if you did.  There is nothing wrong with that, but you should ask the employee about the withholding first.  They may prefer to make an estimated tax payment to cover the excess tax he will owe.  If so, that's his prerogative.  However, for payroll tax purposes, you'll still need to add the amount- he doesn't have a choice there.

Also, make sure you're taking the $50,000 exclusion into account.  Perhaps this is why there is a difference?  Just a thought.  If you want a really good article that helps explain a lot of this, check out: http://www.payroll-taxes.com/articles/art_GTL.html

What I would say is something like this:

Dear Sir;
As you may know, there have been some changes to personnel within the payroll department.  Unfortunately, as I was preparing for the end of the fiscal year, I discovered that there were a few mistakes made by my predecessor that will affect some of our employees' final paychecks.  In your case, the value of your group term life insurance was not calculated correctly.  The value was incorrectly calculated as being far less than it actually is per IRS tables.  This means we will have to tax the difference on your last paycheck(s).  The additional tax will amount to ___ (the difference between the tax he's already been charged (or had withheld) on the 891.53 and the amount he owes on the correct amount of 2,880.36.)  

Allow me to apologize on behalf of the company for this unfortunate mistake, especially at this time of year.

Sincerest regrets,
Kelly,
ABC Company

Hopefully that is a gentle but clear letter.  Best of luck to you.
Vanessa