Getting life insurance through work can be a great perk, but there are tax details that many people have overlooked. If your employer offers $50,000 or more in life insurance, the IRS considers additional coverage taxable income. This doesn’t mean you’re paying for coverage, but it could raise the tax bill slightly. Good news? Understanding how this works will help you avoid surprises and make more informed choices about your interests.
What is attributable income?
Attributable income refers to the non-cash benefits an employee receives from his employer, which means that the IRS still considers taxable income. You can increase your taxable revenue even if you don’t pay these perks from your pocket.
Especially in the case of life insurance, if the employer provides coverage of $50,000 or more, the portion exceeding the limit will be considered attributable income and subject to taxes. This doesn’t mean you’re paying for the insurance itself, but you could see a small tax increase as the IRS considers additional coverage as an additional benefit.
Attribution income is included in the W-2 form as it affects the amount of tax you owe. If it is excluded, you can pay the tax without recognizing it.
The table below breaks down how the IRS calculates monthly tax costs per $1,000 above the $50,000 threshold based on age.
Note: Employer-provided life insurance is usually a term life and covers the term. This differs from other private types of life insurance. Overall life insuranceincludes the cash value component.
| The age of the insured | Monthly taxable income costs per $1,000 over-compensation |
|---|---|
| Under 25 years old | $0.05 |
| 25-29 | $0.06 |
| 30-34 | $0.08 |
| 35-39 | $0.09 |
| 40-44 | $0.10 |
| 45-49 | $0.15 |
| 50-54 | $0.23 |
| 55-59 | $0.43 |
| 60-64 | $0.66 |
| 65-69 | $1.27 |
| Over 70 | $2.06 |
Types of Attribution Income
There are several examples of attributable income that an employer may provide. Examples may include taxable profits not cash related and not part of the employee’s usual taxable wages.
-
Group Period Life Insurance covers death benefits of more than $50,000
- Company vehicle use
- Refunds for travel expenses
- Dependency Care Support Over $5,000
- Educational support exceeding $5,250
- Adoption support when certain thresholds exceed
- Gym membership
- Achievement Award
These are examples of profits that are considered attributable income, but some common profits, such as health insurance and health savings accounts, do not fall into the taxable income category.
How do attributable income work in life insurance?
If your employer offers coverage over $50,000 for the group term life insurance (GTL), the IRS considers the excess cost to be GTL revenue. This means some of the costs of insurance, which are treated as taxable wages, and appears on the W-2 form.
How to calculate attributable income
Calculating attributable income is relatively easy. The key factor is who pays for the policy.
- If the employer fully covers group life insurance, the taxable portion is based on the IRS Premium Table and age.
- If you pay a portion of your premium (as in your voluntary policy), your tax amount will be reduced based on your contribution.
The IRS tables referenced above will help you determine monthly tax costs per $1,000, over $50,000. The employer calculates this and includes it in your taxable wages.
Basic Life Insurance Examples
Consider a 54-year-old employee with $75,000 life insurance coverage through the company-sponsored Group Life Insurance Life Policy. First, you can ignore the initial $50,000 and you’ll still have $25,000 taxable compensation. Then, you can split that $25,000 by following the IRS rules. Using the IRS table, you can see that the tax rate owed by a 54-year-old employee is $0.23 per $1,000. The result is 25 multiplied by $0.23, earning $5.75 a month.
- Overcompensation: $75,000 Overcompensation – $50,000 Compensation = $25,000
- Monthly Attribution Income: ($25,000/$1,000) x .23 = $5.75
- Annual Delivery Income: $5.75 x 12 months = $69 attributable income
At the end of the year, the employer will include $69 on this employee’s W-2 form as part of his taxable income.
Attribution income can also be applied if an employee has a voluntary life insurance policy in which he or she pays premiums for the insurance policy. However, the calculations vary based on the amount the employee pays for premiums and affects annual attributable income.
Examples of voluntary life insurance
Let’s take a look at how attributable income is calculated when an employee chooses supplementary life insurance coverage. This process follows the same steps as the basic employer pay example, but employee premium payments reduce the taxable portion.
For example, a 45-year-old employee would choose to purchase an additional $50,000 with coverage paid by his employer and voluntary life insurance coverage totaling $100,000. The first $50,000 will be exempt, so only the remaining $50,000 will be eligible for attributable income calculations.
- Excessive coverage: $100,000 Total Compensation – $50,000 Exclusion = $50,000 Taxable
- IRS Monthly Rate for 45: Overcompensation of $0.15 per $1,000
- Monthly Attribution Income: ($50,000/$1,000) x $0.15 = $7.50
- Annual attributable income: $7.50 x 12 months = $90
However, if an employee contributes $5 a month to life insurance premiums, this amount is deducted from taxable income.
- Adjusted monthly attributable income: $7.50 – $5 = $2.50
- Adjusted annual investment income: $2.50 x 12 months = $30
In this case, the employee’s taxable income for that year will be $30, which will be reflected in W-2. Employees who contribute more to their voluntary life insurance plans will have lower taxable incomes.
