What Is Imputed Income for Group-Term Life Insurance?
When the value of premiums paid by an employer for group life insurance becomes too great, it's treated as income for tax purposes. Imputed income is the term used to describe this excess value, which applies to group term life insurance coverage with a death benefit over $50,000.
Find Cheap Life Insurance Quotes in Your Area
How does imputed income work?
The IRS considers group term life insurance provided by your employer tax free unless the death benefit is over $50,000. That means you'll pay no taxes on the first $50,000.
But there are tax implications if your employer provides over $50,000 in life insurance coverage and pays less in premiums than the IRS deems the policy to be worth. In this situation, the difference between the value of the policy and what you pay in premiums is called imputed income. You'll pay income tax on this amount.
For example, say you have a $100,000 group life insurance policy that your employer pays the premiums for. Since the death benefit is over $50,000, premiums paid toward the excess life insurance are imputed income. This is calculated by your employer using an IRS imputed income table and then reported on your W-2 tax form.
Why does imputed income matter?
Imputed income is important to recognize since it is a fringe benefit. These are services, goods or experiences provided by your employer in addition to what you're paid. The IRS considers more than $50,000 in group term life insurance a fringe benefit and results in taxable income for you, the employee.
Imputed income is important for employers to note, because this information must be included on employees' W-2s. If it isn't reported, the company will be undervaluing the amount of taxes employees must pay.
IRS imputed income premium table
Under the IRS tax laws, you're required to pay income taxes on the premiums your employer pays if the value of your company life insurance exceeds $50,000. The imputed income value is determined by your age and the IRS schedule below.
Age | Monthly cost per $1,000 in coverage |
|---|---|
| Under 25 | $0.05 |
| 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 over | $2.06 |
Your employer will add the imputed income tax liability to your W-2 at the end of the year.
Calculating imputed income
How to calculate imputed income depends on whether the policy is basic or voluntary. Basic group life insurance is paid for entirely by the employer. Voluntary life insurance is paid partially by the employee.
Example 1: Basic life insurance
An employee has a basic life insurance policy from the company with a death benefit of $150,000 paid entirely by the employer. The employee is currently 47 years old. Using the IRS table, this employee would fall into the 45-to-49 age range and pay 15 cents per $1,000 in coverage over $50,000.
- Excess coverage: $150,000 − $50,000 = $100,000
- Monthly imputed income: ($100,000/$1,000) x 0.15 = $15
- Yearly imputed income: $15 x 12 = $180
- The employer would include the $180 in the employee's W-2 form at the end of the year.
Example 2: Voluntary life insurance
An employee pays $150 per year for a voluntary life insurance policy with his company that has a death benefit of $250,000. The employee is currently 47 years old. Using the IRS table, this employee would fall into the 45-to-49 age range and pay 15 cents per $1,000 in coverage over $50,000, minus premium payments.
- Excess coverage: $250,000 − $50,000 = $200,000
- Monthly imputed income: ($200,000/$1,000) x 0.15 = $30
- Yearly imputed income: $30 x 12 = $360 − $150 (what the employee pays in premiums) = $210
Editorial Note: The content of this article is based on the author's opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.
