Imputed income is the benefit that an employee receives beyond their salaries and wages, like a gym membership, employee discount, or access to the company car. In the context of insurance, when your employer provides group term life (GTL) policies, the Internal Revenue Service (IRS) requires that coverage exceeding $50,000 be reported as taxable income on your tax return. In other words, when employer insurance premiums become too high, any amount more than $50,000 should be classified as regular income for tax recording.
This article discusses what GTL imputed income means, how the IRS computes taxable income in life insurance, and the different categories of imputed income.
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Why Is It Called Imputed Income?
The term imputed income comes from the Latin word imputare, which means “to charge to someone’s account.” In this case, the IRS is charging the employee for the value of the life insurance coverage received from the employer.
There are many types of imputed income, but some of the more common examples include
- Employer-provided health insurance
- Employer-provided dental insurance
- Employer contributions to a retirement plan
- Gym memberships
- Employee discounts
- Company cars
In short, whenever an employer provides a benefit to an employee, it is considered imputed income. The employee does not “earn” this money in their paycheck, and therefore, cannot take deductions based on this “income.”
What Is Imputed Income Life Insurance?
Imputed income life insurance is the additional taxable income that employees receive when their employers provide group life insurance policies. The IRS requires employers to report coverage exceeding $50,000 on employees’ tax returns.
The purpose of recording imputed income — rather than having employers simply pay for the life insurance policies — is to ensure that employees have some skin in the game, so to speak. That is, by making the imputed income taxable, employees are more likely to carefully consider whether they need the coverage and its associated costs.
Imputed income life insurance allows employers to offer group life insurance policies at a reduced cost to themselves while still allowing employees to make an informed decision about whether they want coverage. Employers can also use this method as a way of helping workers save for retirement or other goals without requiring them to contribute directly from their paychecks.
How the IRS Determines Taxable Income for Excess Coverage
The IRS uses a specific formula to determine how much imputed income should be reported on an employee’s tax return. This formula takes into account the cost of the insurance plan and the employee’s personal circumstances, such as marital status and number of children.
The taxable coverage amount formula is simply:
(The death benefit amount) – ($50,000).
While the formula for finding imputed income on your W2 is
(Cost per $1000 of taxable coverage) – (the amount paid by the employee).
To give you an idea of how much it would cost you if your company-provided life insurance that goes beyond $50,000 in death benefit, here is the latest IRS cost schedule (page 15) for every $1,000 covered:
|Age||Cost per $1,000 of Protection per Month|
|25 to 29||$0.06|
|30 to 34||$0.08|
|35 to 39||$0.09|
|40 to 44||$0.10|
|45 to 49||$0.15|
|50 to 54||$0.23|
|55 to 59||$0.43|
|60 to 64||$0.66|
|65 to 69||$1.27|
|70 and older||$2.06|
Consider also the following examples to help you understand the point better.
John is 42 years old and has opted for $100,000 of life insurance coverage through his employer’s group term life insurance plan.
John does not pay the premiums for the policy.
Because the policy is over $50,000, John needs to include extra income on his tax return.
According to the table, John must pay $0.10 per $1,000 of coverage over the $50,000.
$100,000 – $50,000 = $50,000
($0.10) x (50) x (12) = $60.00
That is, John has to include $60 of imputed income on his tax return.
All said and done, John has the amount of $12.00 reported on his W2 as wages in boxes 1, 3, 5, and 12.
Debbie is 30 years old and has $200,000 of group term life insurance through her employer. Debbie pays $50 a year for the insurance.
Because Debbie is 35 years, she pays $0.08 per $1,000 of coverage.
Imputed income is only calculated on coverage over $50,000. So, Debbie’s imputed income is based on $150,000 of the death benefit of her policy.
($200,000) – ($50,000) = $150,000
($0.09) x (150) x (12) = $162.00
($162.00) – ($50.00) = $112.00
Debbie’s W2 has the amount of $12.00 reported as wages in boxes 1, 3, and 5. The $12.00 amount is also reported in IRS Form W-2, Box 12, Code C.
How Imputed Income Works in Life Insurance
Now that we’ve covered the basics of imputed income, let’s take a look at how it works in life insurance. Simply put, imputed income is the amount of money you pay taxes on above and beyond the actual death benefit over $50,000.
This is important to understand as it can have a major impact on the overall value of your life insurance policy. For example, if you are subject to imputed income taxes, and your policy has a death benefit of $100,000, you’ll only really be able to take home $90,000.
It’s also worth noting that imputed income taxes are generally applied at the federal level and may also be applicable at the state level. As such, it’s important to consult with an accountant or tax or insurance specialist well-versed in imputed income concerns to get a better understanding of how this will affect you.
Imputed income can be a tricky subject when it comes to figuring out life insurance. It’s important to understand what imputed income is, how it affects your life insurance premiums, and what steps you can take to mitigate its impact on your policy. If you have questions about this, consider reaching out to an insurance professional who can explain the process and advise you about your next moves.