Tax #1 – Over $50,000
For companies that provide more than $50,000 in employer-paid life insurance, amounts over $50,000 are considered a fringe benefit and are subject to imputed income. If you offer more than one life policy, you’ll need to aggregate all values together – only one $50,000 exemption is allowed per year.
Tax #2 – Discriminatory Plans
You will be required to include ALL key employee life amounts in their imputed income if your plan is discriminatory (no $50,000 exclusion). There are three types of discriminatory plans:
- Those providing more coverage to key employees than non-key (when providing a “flat” dollar benefit)
- Those covering less than 70% of full-time employees (you can exclude employees with < 3 years of service)
- Those where more than 15% of the insureds are key employees
In 2017, a key employee is defined as an officer with annual pay greater than $175,000, a 5%+ owner, or a 1%+ owner whose annual pay was more than $150,000.
Tax #3 – Dependents
If your company pays for more than $2,000 in life coverage for employees’ dependents, you’ll need to include the FULL amount of the dependent life coverage in imputed income.
Calculating Imputed Income
TThe monthly “cost” of insurance to include in an employee’s wages is calculated using either the Table 1 rates or the actual rates for the coverage. For nondiscriminatory plans, you use the Table 1 rates. For discriminatory plans, you need to use either Table 1 rate or the actual rate, whichever is greater.