IRS Issues New Rates to Calculate the Cost of Group-term Life

You can provide employees with up to $50,000 in group-term life insurance as a tax-free benefit. The cost of the group-term life insurance in excess of $50,000 is included in the employee’s gross income to the extent it exceeds the amount, if any, paid by the employee for the coverage and must be reported on an employee’s Form W-2. This “imputed income” is not subject to federal income tax withholding. However, it is subject to FICA tax and, for active employees, an employer is required to withhold the FICA tax at least once a year.

The IRS has issued final regulations which revise the uniform premium table used to calculate the cost of group-term life insurance for reporting on an employee’s Form W-2. The new rates are generally effective on July 1, 1999.

Example: Relo Corporation pays the premiums on a $70,000 group-term life insurance policy on Jane Doe, an employee. Jane is 50 years old. Excess coverage is $20,000 ($70,000 minus $50,000). The monthly rate for $1,000 of excess coverage for a 50-year-old employee is $0.23. The $0.23 cost is multiplied by 20 ($20,000 excess coverage divided by $1,000) to give a $4.60 monthly value of the excess coverage. The annual value of the excess coverage will be $4.60 multiplied by 12 months to yield $55.20 in total income to be reported on Jane’s Form W-2.

Note: Although the regulations are effective July 1, 1999, changes to payroll systems are not required to be made by then. Employers currently withholding FICA taxes on a pay period basis can either:

1. change methods to treat the new amounts that are includible in income after July 1, 1999 as paid on December 31, 1999, or
2. continue to withhold using the prior table’s rates, so long as adjustments for the post-July 1, 1999 FICA withholding amounts are made by the last pay period for 1999.

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