Student Question from: John C.
Course: Income Tax – Gross Income Calculation
Hi. I just wanted to verify that the employee premium in the example below is not prorated between the “tax-free” and taxable insurance coverage. And, if it’s not, why?
Here is my calculation: 5 x 4.5% + 7 *0.5 % = 26% x 3000 = $780
Example: An employee age 44 is covered under a group term plan providing life insurance of $150,000 for all 12 months. The employee pays $50.00 for this coverage for the year. Table I is used to calculate the monthly cost of the $100,000 coverage that exceeds the $50,000 that is tax-free.
|Table 1 Rates for Group Term Life Insurance|
|5-Year Age Bracket||Cost per $1,000 of Insurance for One-Month Period|
|Under age 25||$.05|
|25 to 29||.06|
|30 to 34||.08|
|35 to 39||.09|
|40 to 44||.10|
|45 to 49||.15|
|50 to 54||.23|
|55 to 59||.43|
|60 to 64||.66|
|65 to 69||1.27|
|70 and above||2.06|
Using Table I rates, 100 times $0.10 equals $10.00 of monthly costs. The annualized cost over 12 months is $120.00. After subtracting the employee’s payment of $50.00 for this coverage, the employee recognizes $70.00 in taxable income for the year.
Good question, John. Let’s look at this a different way to see what is happening here. The employee is getting $150,000 of coverage. The total cost of this coverage is $15 per month for 12 months = $180.
The employee is paying $50 of this cost; thus, the employer is paying the remaining $130 of this cost. So, the ONLY tax question we need to consider is if the employer is providing a taxable benefit to the employee by paying that $130 and, if so, how much is that taxable benefit to the employee? The issue we are considering has nothing to do with what the employee is paying; it is all about whether or not the employer is providing a taxable benefit.
To get our answer, the first $50,000 of coverage paid by the employer costs $5 x 12 = $60. Since the first $50,000 of coverage provided by an employer does not result in a taxable benefit for the employee, this $60 of premiums is tax-free to the employee. The remaining $70 of premiums being paid by the employer is for employer-paid coverage beyond $50,000 and is, therefore, a taxable benefit to the employee.