Imputed Life Insurance: Fica Wages Inclusion?

Life insurance is a common benefit offered to employees at little to no cost. When it comes to group term life insurance, the Internal Revenue Service (IRS) considers it a tax-free benefit as long as the policy's death benefit is below $50,000. However, when the death benefit exceeds this amount, the IRS treats the excess amount as imputed income, which becomes taxable. This additional income is included in the employee's gross earnings and is subject to FICA (Federal Insurance Contributions Act) taxes, which include Social Security and Medicare taxes.

Group term life insurance with coverage over $50,000

Group term life insurance is a common employee benefit, with 85% of organizations offering it. It is a type of insurance policy that covers a group of people, such as employees in a business, rather than individuals. The employer is the policyholder, and they can make changes or terminate the contract. These policies are usually temporary, with coverage being renewed each year.

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. There are no tax consequences if the total amount of such policies does not exceed $50,000. However, the imputed cost of coverage in excess of $50,000 must be included in income and is subject to social security and Medicare taxes. This is calculated using the IRS Premium Table, which sets a predetermined cost per $1,000 of coverage per month based on age brackets.

If an employee receives more than $50,000 of employer-provided group term life insurance coverage, the "cost" (imputed income) of the insurance in excess of $50,000—less any amount paid by the employee with after-tax contributions—is included in the employee's gross income for federal and FICA tax purposes. This means that any premiums paid for the benefit over the $50,000 threshold are treated as normal income for tax purposes.

For example, a 42-year-old employee with $150,000 in group life insurance coverage and paying $100 per year in premiums would have $20 of imputed income. This is calculated by subtracting $50,000 from the policy amount, leaving $100,000. This is then divided by 1,000, which equals $100. Multiplied by $0.10 (the cost for 40 to 45-year-olds) and 12 months of coverage, this comes out to $120. Once the employee's contributions of $100 are subtracted, the imputed income is $20.

The IRS requires employers to report imputed income on an employee's W-2 form, in addition to their gross income. This information should be entered into boxes 1 and 16, 3, 5, and 12 with code C.

Calculating imputed income

• Identify the benefit: Determine which non-monetary benefits provided by the employer are considered imputed income under tax laws. Examples include company vehicles, education assistance, reimbursement for moving expenses, and life insurance.
• Determine the Fair Market Value (FMV): Estimate the benefit's fair market value, which is the amount an individual would pay for the benefit on the open market. For instance, if an employee receives a company car, the FMV would be the cost of leasing a similar vehicle.
• Subtract employee contributions: If the employee pays a portion of the cost of the benefit, subtract this amount from the FMV. For example, if an employee pays rent for company housing, subtract that amount from the total housing cost.
• Apply exclusions: Some benefits may have exclusions or thresholds under tax laws. Apply these rules to reduce the taxable amount of the benefit. For instance, the first $50,000 of group-term life insurance coverage is excluded from imputed income.
• Calculate the imputed income: Add the final amount to the employee's gross taxable income. This amount is subject to federal income tax and FICA (Federal Insurance Contributions Act) taxes, which include Social Security and Medicare taxes.

It is important to note that employers are responsible for calculating and reporting imputed income to both the employee and the IRS. This information should be included on the employee's W-2 form, affecting their overall tax obligations for the year.

FICA taxes

In relation to imputed life insurance income, it is indeed included in FICA wages. If an employee receives more than $50,000 in employer-provided group term life insurance coverage, the excess amount is considered imputed income and is subject to FICA taxes. This means that the "cost" of the insurance above $50,000, minus any after-tax contributions made by the employee, is included in the employee's gross income for FICA tax purposes. This is outlined in Code Section 79, which governs employer-sponsored group term life insurance plans.

The inclusion of imputed life insurance income in FICA wages is important for both employees and employers. Employees need to be aware of this to ensure they are paying the correct amount of FICA taxes. On the other hand, employers are responsible for withholding the employee's portion of FICA taxes and remitting both the employer and employee FICA amounts. Therefore, they must correctly calculate and report the imputed income on the employee's W-2 form.

It is worth noting that there are certain requirements for a group term life insurance plan to be considered "carried" by the employer and trigger the imputed income tax. These requirements include the employer paying any part of the premiums or offering voluntary life insurance with rates that "straddle" the IRS Table I rates.

Imputed income on W-2 forms

Imputed income is the value of benefits received by employees that are not part of their salaries. It is considered "fringe benefits" or "perks" that an employee receives in addition to their regular income. Imputed income can be in the form of cash or non-cash compensation. However, as long as it adds to the employees' taxable income, it is considered imputed and should be presented as such on the employee's tax documents.

The Internal Revenue Service (IRS) offers a list of fringe benefits that count as imputed income. Some, however, are exempt up to a certain amount. Here are some examples of benefits that are taxed as income:

• Group term life insurance (if over $50,000)
• Education assistance (if over $5,250 per year)
• Qualifying achievement awards (if over $1,600 in value)
• Personal use of a company vehicle
• Gym memberships and fitness incentives
• Adoption assistance (in excess of the yearly federal adoption tax credit)
• Moving expense reimbursement (except for active U.S. Armed Forces members following a military order)

The IRS also lists several fringe benefits that are excluded from imputed income, also called "de minimis benefits". These perks hold little value and tax impact, and the IRS finds it impractical or unnecessary to record them. Examples include:

• Occasional office snacks
• Holiday gifts with a value of less than $100 (except gift cards, which are always taxable)
• Occasional meals or transportation money for working overtime
• Group-term life insurance coverage for an employee's spouse or dependent with a face value of no more than $2,000
• Personal use of a company cell phone primarily for business purposes

As per the IRS, imputed income for employer-provided life insurance is calculated using the IRS Premium Table. This table sets a predetermined cost per $1,000 of coverage per month based on established age brackets.

If the death benefit for a group term life insurance policy is valued above $50,000 and the employer contributes to any part of the premium, the excess amount is treated as imputed income. This means any premiums paid for the benefit over the $50,000 threshold are treated as normal income for tax purposes.

Imputed income must be reported on an employee's W-2 form in addition to their gross income. It should be included in boxes 1, 3, 5, 12, and 16 with code C.

Fringe benefits

• Use of a company vehicle
• Life insurance coverage
• Education assistance
• Reimbursement for moving expenses
• Vacation
• Discounts on property or services
• Memberships in country clubs or other social clubs
• Tickets to entertainment or sporting events

Frequently asked questions