Group Life Insurance: Pa Tax Laws Explained

Group Term Life Insurance is a type of insurance offered by employers as a benefit to eligible employees. While the first $50,000 of coverage is typically excluded from taxable income, any amount exceeding this threshold becomes taxable income for the employee. This additional coverage is included in the taxable wages reported on the employee's Form W-2, resulting in what is often referred to as phantom income. This means that employees may be taxed on income they never actually received, which can have unintended financial consequences. Understanding the tax implications of group life insurance is crucial for both employers and employees to make informed decisions regarding their financial planning and tax obligations.

Group Term Life Insurance (GTL) over $50,000 is taxable

Group Term Life Insurance (GTL) is a type of term insurance offered by employers as a group benefit to eligible employees. Typically, employers pay most or all of the premiums for basic coverage, but additional coverage may be offered for an extra premium charged to/paid by the employee.

If the total amount of coverage does not exceed $50,000, there are no tax consequences. However, if an employer offers GTL in excess of $50,000, the employer's portion of the premium above this threshold must be included in the employee's taxable wages. This additional coverage is taxable for the following:

• FICA (SS/MED)
• Federal Withholding
• Federal Unemployment
• State Unemployment

It is important to note that GTL in excess of $50,000 is exempt from PA state and local tax withholding.

When it comes to reporting and processing GTL amounts, these can be recorded on the same check as standard wages for a scheduled pay date or on a separate check and pay date. If recorded on the same check, the Group Term Life amount will be combined with regular wages, and the required taxes will be deducted from the employee's regular wages. On the other hand, if recorded separately, additional wages may need to be added to cover the required taxes or the company may need to cover these tax costs.

The tax implications of GTL in excess of $50,000 can be mitigated through a "carve-out" plan. For example, an employer can provide $50,000 of group term insurance, which has no tax cost, and then offer an individual policy for the remaining coverage. Alternatively, the employer can give the employee a cash bonus equivalent to the excess coverage cost, which the employee can use to pay premiums on an individual policy.

GTL is exempt from PA state and local tax withholding

Group Term Life (GTL) Insurance is a type of term insurance offered by employers as a group benefit to eligible employees. Typically, employers pay most or all of the premiums for basic coverage, and employees may pay for additional coverage. While the first $50,000 of group term life insurance coverage provided by an employer is excluded from taxable income, there are tax consequences if the total amount of coverage exceeds this threshold.

In the context of Pennsylvania (PA) state and local tax withholding, it is important to note that if the employer offers Group Term Life Insurance in excess of $50,000, the portion of the premium exceeding this amount becomes taxable income for the employee. This means that the employer's contribution above $50,000 must be included in the employee's taxable wages.

However, according to IRS regulations, Group Term Life Insurance in excess of $50,000 is specifically exempt from PA state and local tax withholding. This exemption is reflected in the categories of taxable wages outlined by the IRS, which include:

• FICA (SS/MED) - Taxable
• Federal Withholding - Taxable
• State Withholding - Taxable (PA Exempt)
• Local Withholding - Taxable (PA Exempt)
• Federal Unemployment - Taxable
• State Unemployment - Taxable

This exemption from PA state and local tax withholding means that, despite the increased taxable income, employees in Pennsylvania will not be subject to additional state or local taxes on their Group Term Life Insurance benefits that exceed $50,000.

It is worth noting that this exemption is specific to Pennsylvania and may not apply in other states. Additionally, while the state and local taxes are exempted, employees are still responsible for federal taxes and associated Social Security and Medicare taxes on the excess coverage amount.

Life insurance is not taxable in the estate of the decedent

Life insurance is generally not taxable in the estate of the decedent in Pennsylvania. This means that, in the state of Pennsylvania, life insurance payouts are not subject to tax when the policy holder passes away. However, there are certain conditions and scenarios that can impact the tax status of life insurance.

Firstly, it is important to distinguish between group term life insurance and individual policies. Group term life insurance is a type of insurance offered by employers as a benefit to eligible employees, and it is often provided at no cost to the employee. While the first $50,000 of group term life insurance coverage is typically excluded from taxable income, any amount exceeding this threshold becomes taxable income for the employee. This is because the employer-paid cost of coverage above $50,000 is considered a form of compensation to the employee and is, therefore, subject to income tax. This tax consequence can be mitigated if the employer offers a "carve-out" plan, which may involve providing $50,000 of group term insurance (up to the non-taxable threshold) and then offering an individual policy for additional coverage. Alternatively, the employer can choose to provide the employee with a cash bonus equivalent to the cost of excess coverage, which the employee can then use to pay premiums on an individual policy.

It is worth noting that the tax implications of life insurance can vary depending on the age of the insured individual and the maturity age specified in the policy. Many older life insurance policies mature at a specific age, often 95 or 100, and if the insured individual reaches this age, the policy's cash value may be paid out to the policy owner instead of a death benefit payment. This payout may be taxed as ordinary income if it exceeds the policy owner's cost basis. To avoid this taxable risk, some policies offer a maturity extension rider, which allows the policy to continue until the death of the insured. Newer life insurance policies may also have a higher maturity age or an indefinite period, reducing the likelihood of a taxable payout during the lifetime of the insured.

The cost of group term insurance is determined by an IRS table

Group term life insurance is a type of insurance offered by employers as a benefit to eligible employees. It is tax-free for employees as long as the policy's death benefit is less than $50,000. This is because IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer.

However, if the employer offers group term life insurance coverage in excess of $50,000, the employer's portion of the premium exceeding this amount must be included in the employee's taxable wages. This is where the IRS Premium Table comes in. The cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and is subject to social security and Medicare taxes. The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.

The IRS Premium Table is also used to calculate the imputed income value of the life insurance coverage exceeding $50,000. This imputed income value is then added by the employer to the employee's W-2 tax form at the end of the year. The imputed income value is determined by the employee's age and the IRS schedule.

For example, let's say an employee has a basic life insurance policy with a death benefit of $150,000, which is paid entirely by their employer. The employee is 47 years old. Using the IRS table, they would fall into the 45- to 49-year-old range and incur a cost of 15 cents per $1,000 in coverage. The excess coverage would be $150,000 - $50,000 = $100,000. The monthly imputed income would be calculated as ($100,000 / $1,000) x .15 = $15. The yearly imputed income would be $15 x 12 = $180, which the employer would then include in the employee's W-2 form.

A maturity extension rider can mitigate the taxable risk of a policy payout

In Pennsylvania, life insurance on the life of a decedent is not taxable in the estate of the decedent, provided it is not an annuity. However, if an employer offers group term life insurance in excess of $50,000, the employer's portion of the premium exceeding that amount is included in the taxable wages for the employee. This means that the payout from a group life insurance policy can be subject to tax in certain circumstances.

A maturity extension rider is a provision in a life insurance policy that extends the maturity date (or expiration date) of the policy beyond its original date. This means that the policy will continue to provide coverage for the policyholder even after they reach the original maturity date. By extending the maturity date, a maturity extension rider can help to ensure that the policy payout is not taxable. This is because, in Pennsylvania, life insurance proceeds are not taxable according to state income tax laws.

There are two versions of the maturity extension rider. One version provides for a death benefit after the original maturity date that is equal to the accumulation value on the date of death. This version has no charge associated with it. The other version also provides a death benefit after the original maturity date, but it is equal to the death benefit in effect on the day before the original maturity date. If the death benefit is based on the accumulation value, the insurance company will adjust the death benefit by future changes in the accumulation value. This version of the rider has a monthly charge of no more than $30 per thousand of the net amount at risk during the nine policy years before the original maturity date.

It is important to note that extending the maturity date beyond the insured person's age of 100 may result in the current taxation of increases in the policy's accumulation value due to interest or investment experience after that time. Therefore, it is advisable to consult a qualified tax advisor before making such an extension.

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