Taxable Cost Of Group Term Life Insurance Over 000 – Employers Technical Bulletin Internal Revenue Code: Section 79 Tax Consequences of Group Term Life Insurance November 2005 Overview As an employer, you can get up to $50,000 of group life insurance that covers employees tax-free. The employee is taxed on coverage costs over $50,000. We want to make sure you know the tax consequences for employees with group life insurance over $50,000. We’ve included some examples to help you work through the math. Look for the example that most closely matches your current situation and ignore the others. The cost of employer-provided group term insurance (GTL) in excess of $50,000 is taxed as employee income. Employer-provided GTL insurance covers all GTL policies: 1) paid for in part or in whole by the employer; or 2) the employee’s portion of the premiums is deducted before tax; or 3) the employee pays all premiums after tax, and the premium rates differ (some are lower and some are greater than) the values in Table 1. The attached table is used to calculate the amount of imputed income included in an employee’s taxable income for GTL insurance over $50,000. As an employer, you must enter the amount of wages calculated on the employee’s gross income (Form W-2, box 1) and withhold from other taxes the appropriate FICA taxes on the amount of wages calculated before the end of the calendar year. We are pleased to provide you with this summary of the tax credit for group term life insurance benefits over $50,000. Please remember that this content may be used for informational purposes only. If you have specific questions or concerns about a particular factual situation, we recommend that you contact your tax advisor. For general questions regarding group term life insurance taxation, please contact your compliance specialist when calculating the cost of Group Term Life Insurance UNIFORM PREMIUM TABLE ( TABLE 1 ) Monthly Costs for 2 Employee Years (per $1,000 of Benefit) Estimates of Table I. below of $25 and over See Note 2 on page 5 Calculate the taxable cost of each month of employee coverage by multiplying the number of thousands of dollars of monthly insurance, less than 50, by the cost of the above. the table. The answer is from Gallagher:
2 Sample calculations Choose an example that is most similar to your current situation. Please also check the notes on page 5 before doing the actual calculations. Example 1: You offer group term life insurance and pay 100% of the premium cost. Required: You provide employees with a GTL benefit of twice the annual basic income (2 x BAE). Sarah is 37 years old and her income is $42,000. GTL Insurance $84,000 GTL amount under Table 1 34,000 Step 2: Find the expenses that will be included in Sarah’s income as taxable wages. Table 1 rate is $.09 per $1, (amount over 50k) x.09 (Table 1) x 12 (month) = $36.72 Step 3: Check tax. Enter Table 1 expenses (income) of $36.72 in Sarah’s gross income (Box 1 of Form W-2) and FICA taxes will be withheld from other wages by $ Example 2: You apply Group Income insurance to employees and pay 100 % of cost. Under a separate policy, it also provides voluntary employee-paid GTL insurance to employees. Employees pay 100% of the cost of voluntary GTL insurance after tax. Step 1: For an employer provided with GTL, Calculate and check the tax in table 1 as in example 1. Step 2: Determine if you need to calculate the calculated income for GTL insurance paid for voluntary work. To do this, compare your group premiums by age group to the values in Table 1. If your premiums in each age group are equal to, less than, or all greater than the levels in Table 1, no income can be counted. You can stop here. The answer is from Gallagher:
Taxable Cost Of Group Term Life Insurance Over $50 000
3 If some of your premiums are less and some are greater than the levels in Table 1, you must calculate the imputed income of all participants whose voluntary GTL rate is less than the levels in Table 1 using the following example 3. Skip to example 3 now. * If you have voluntary GTL insurance with Beneficiary BUFFET SM, no income responsibility is calculated because all GTL amounts are greater than the rates in Table 1 (unless premiums are deducted before tax). Example 3: You provide employees with group term insurance, where you pay part of the premium and the employees pay the rest. The employee’s portion of the premium is paid subject to tax. Required: Provides employees with a GTL insurance benefit of twice the annual basic income (2 x BAE). You pay 50% of the cost and the employees are responsible for 50%. The premium for GTL insurance is $.20 per $1,000 of coverage. Elizabeth is 47 years old and her salary is $65,000. $65,000 (BAE) x 2 = $130,000 GTL amount under Table 1 80,000 Table 1 rate is $.15 per $1, (value over 50k ) x.15 (Table 1) x 12 (months) = $ Step 3: Determine the employee premium cost of GTL insurance over $50, (value over 50k) x.20 (premium) x 12 (month) = Employee portion times (percentage) cost.50 Total amount paid employee out-of-pocket $96, 00 Step 4: Calculate the amount of income that must be included in the employee’s taxable income and assess FICA on that amount. Table 1 Total From Step Insurance Payments Minus Paid Step Total Amount Depends on Calculated Income $48.00 In this example, $48.00 will be included in the gross income (Box 1 of the W-2) and FICA taxes will be withheld from other wages for $ . , but the amount the employee paid after tax for the out-of-pocket GTL insurance is greater than the total amount from Table 1 (ie the negative number in step 4), then no income is counted. added to the W-2 amount. The answer is from Gallagher:
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4 Note: The calculation method will be the same if, for example, the employer provides GTL insurance equal to 1 x BAE and employees can purchase additional GTL insurance paid after tax. Example 4: You offer group term life insurance where you pay part of the premium and the employees pay the rest. The employee’s portion of the premium is paid before tax. Required: Provides employees with a GTL insurance benefit of twice the annual basic income (2 x BAE). You pay 75% of the cost and the employees are responsible for 25%. The premium for GTL insurance is $.20 per $1,000 of coverage. Donna is 42 years old and her salary is $65,000. $65,000 (BAE) x 2 = $130,000 GTL Amount under Table 1 80,000 Table 1 rate is $.10 per $1, (Amount over 50k ) x.10 (Table 1) x 12 (months) = $96.00 Step Step 3: Calculate the cost of the premium for an employee who has paid part of the GTL insurance. GTL Insurance is subject to Table 1 80, 000 times the employer-paid portion.75 The employer-paid portion of GTL is subject to Table 1 60, 000 GTL-Assurance is subject to Table 1 80, 000 Minus the employer-paid portion of GTL is subject to Table. 1 ( 60,000) Employee paid portion of GTL based on Table 1 20, (EE paid portion of GTL) x.20 (Premium) x 12 (Month) = $48.00 Step 4: Calculate the total amount of imputed income for the included employee s gross income (Box 1 of W-2) and FICA subject to assessment. To do this, compare the cost of Table 1 ($96.00) to the employee-payable portion of the premium cost ($48.00) and check the income attributable to the higher amount ($96.00 in this example). (You do not subtract the employee portion of the premium ($48.00) from the Table 1 amount because the premium was paid before tax.) Gallagher Reppond,
5 Example 5: You provide group term life insurance to employees and pay 100% of the first 1 x BAE. Employees can purchase additional coverage and pay their portion of the premium before the tax base. Prerequisite: Emily chooses to purchase 2 x additional BAE. He is 32 years old and earns $30,000. The premium for GTL insurance is $.20 per $1,000 of activity. GTL Insurance (3 x 30k) $90,000 GTL amount under Table 1 40,000 Table 1 rate is $.08 per $1, (amount over 50k) x.08 (Table 1) x 12 (month) = $38.40 Step 3: Calculate d ‘GTL insurance premium costs for employees. 40 (value over $50k) x.20 (premium) x 12 (months) = $96.00 Step 4: Calculate the total amount
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