Question

Group Term Life Insurance Many employers limit providing employer-paid Group Term Life Insurance to $50,000. The IRS allows the $50k limit without assessing a tax on the value of this benefit. For a life insurance benefit in excess of $50k, the affected employee will have to include as income and pay income taxes. So some employers avoid the administrative chore of calculating the excess benefit and adding it to the employee’s annual W-2. A consequence to those employers may be a less competitive employee benefits package. So how difficult is it to calculate the additional cost to the employee? The IRS allows the $50k limit without assessing a tax on this benefit. A benefit in excess of $50,000 will result in a tax consequence. Calculate the tax consequence (increase) for an employee who: 1. Is age 45 on January 1st 2. Is in a 14% income tax bracket and earns $60,000 for the year 3. Employer provides $120,000 of group life insurance coverage (2x salary) 4. Employee’s salary does not change during the year. Your task is to calculate the increased benefit cost to the referenced employee for the year. Instructions: Look up the IRS Uniform Premium Table and determine the monthly excess benefit rate per thousands of excess coverage. Then calculate the annual tax cost to the employee. Describe your calculations in your response along with the employee’s cost.

Answer 1

GROUP LIFE INSURANCE COVERAGE

According to IRS Uniform Premium Table, the COST per $1,000 for 1 month for a 45 year old is $0.15.

The first $50,000 earned by the employee is not taxable. The remaining $70,000 ($1,20,000 - $50,000) is taxable.

Now, we divide the $70,000 by $1,000 because the premiums are per $1,000 of insurance. The resultant number is 70 ($70,000/$1,000).

Therefore, the monthly Tax Cost is 0.15 * 70 = $10.5 and the annual Tax Cost is $10.5* 12 = $126.