"grandfathered employees" receiving fully paid benefits
kwelzel
27 Posts
We have a group of employees, not all are highly comped, that have been with the company for many years. The owner pays for all of their health insurance premium, both single and family. I was recently told in a class that the premium paid for the difference between single and family would be taxable a benefit to the employee.
Also, our company pays for life insurance for all fte's. I was also told that any coverage above 50k would be taxable also. It was stated that this was under ERISA regs.
Anyone out there know about this?
Also, our company pays for life insurance for all fte's. I was also told that any coverage above 50k would be taxable also. It was stated that this was under ERISA regs.
Anyone out there know about this?
Comments
I believe the insurance benefits paid for by the employer for some of your employees would be taxable because not everyone is receiving that benefit. If the employer paid the full cost of insurance for everyone, then it would not be taxable. (I can't point you to a specific law, but was told that by a CPA/auditor.)
Terri
The taxes related to life insurance over $50,000 are income taxes on the premium only. In other words, say your policy provdes life insurance for employees in an amount equal to one year's salary. Say that an employee earns $100,000 per year. Say that the life insurance costs 12 cents per $1000 of coverage per month. The cost to insure this hypothetical employee would be $12.00 per month. 1/2 of the $12 would be for the first $50,000 of coverage. That amount of coverage can be provided by an employer to an employee without calling the insurance premium income to the employee. For the other half of the coverage (which costs $6.00 per month), the amount the employer pays for the coverage (i.e., $6.00) is considered wages to the employee and, thus, the usual taxes must be withheld on that amount. Thus, this employee would get an extra $50,000 of life insurance by only paying the income taxes on (in this example) an extra $72 per year in income, which is a pretty good deal.
I am not sure what happens tax-wise if the life insurance proceeds are ever received by the employee's beneficiaries but that isn't your problem as the employer. You just need to know that any PREMIUM the employer pays for life insurance over $50,000 is considered taxable wages to your employee.
The IRS considers group term life insurance worth less than $50,000 a de minimus fringe benefit. Anything more than $50,000 is taxable income. Therefore if you have an employe who earns $50,000 and your company offers 1-1/2 times annual salary group term life insurance ($75,000 benefit in this case), this employee would have $50,000 in life insurance for free (de minimus fringe benefit) and $25,000 of coverage that qualifies as 'taxable income'.
The IRS has a table you must use to calculate the value of that $25,000 (see Publication 15-B.) The rates are based upon age. If in this case the employee was 42 we would go to the table and find that for age 40-44 the rate is $.10 per $1,000. You would calculate the monthly cost as $25,000/$1,000*.10 = $2.50.
In our system we have a pay code and a deduction code both labeled "Excess Life'. Every month, we add the taxable cost of the life insurance (in this case $2.50) to wages under the pay code and deduct the same amount using the deduction code. This employee, paid bi-monthly, would get paid income wages of $2,083.33 one payday per month, and $2,085.83 (with the extra deduction) the other payday per month. Many companies process this once a year, but with wage increases staggared and the occasional "Oops! I forgot!" when an employee left, we decided it was easier to handle on a monthly basis. Partial month coverage (if you have it) must be pro-rated.
To complicate matters, if the employee helps contribute to the plan, then his portion would come off the over $50,000 amount. There are other restrictions, of course, but this covers most employers/employees. I suggest you read the rules for yourself in Publication 15-B.
Good luck!
I too didn't see this question earlier. I will not comment on the groupi insurance because it probably depends upon a lot of extra stuff that isn't mentioned.
But for Life Insurance, the ones that tell you the over $50,000 coverage where employer pays the premium is considered taxable income for the employee. First, I don't know who you use for payroll, but most payroll companies have this set up in their deduction tables. (We use Ceridian and it is.) All we do is when employee is eligible for coverage, we put in the deduction (W2GRP), it asks the amount of the life insurance we pay for, and it calculates the taxable income for the employee (using their age and the IRS rate which is already in their system.) Then, each pay period (weekly) there is an amount which is added to the employee's taxable income. No federa/state taxes are taken out, but just added to taxable income. It is quite easy. Where I used to work, we did it once a year and it was a mess because it can mess up the employees gross income and they get mad.
One other thing you may want to think about that no one else has mentioend, when their life coverage changes (usually when salary changes) you may have to go back and check the "W2GRP" deduction and update it. Our life document/policy is set up that we only make changes in life insurnace at the renewal of the policy (or just once a year.) So, if employee gets an increase, their life insurance won't necessarily go up. Will be looked at on the Plan renewal date.)
In case you need the Life Ins. taxable rates, they are:
20-24= .05
25-29 = .06
30-34= .08
35-39=.09
40-44= .10
45-49= .15
50-54= .23
55-59= .43
60-64= .66
65-69= 1.27
You multiply these times the amount of life insurane over $50,000 and that is the annual amount. Then you divide it by how often you process this taxable income amount.
Terri, for life insurance, anything over $50,000 per year that is paid by the company (and the employee'choice is beneficiary) is considered a taxable benefit. You may want to quiz your payroll processing company more closely. Most do have this built in. They may not be understanding what you are saying. We have this set up under a deduction (W2GRP) and Social Security and Medicare are taken out each pay period. Also, it goes into the total compensation bucket for employee's W-2, but no state or federal taxes are deducted. Our payroll company has where you put in the total amount of insurance and it automatically calculates the taxable income each pay period.
My prior company didn't do this. I had to manually calculate this figure before the end of each year. It was a pain because we often forgot to do it before someone terminated. Also, it can take out a chunk of money (SS and Medicare) on one check and employee gets mad.
If your payroll processing company does't have a deduction for this you can do 1) set up a spread sheet and manually calculate what it should be for each person annually and then divide that by number of pay periods. You set up a deduction, with your payroll processing company's help, where it is handled correctly and money falls in correct bucket on W-2. (Payroll processing company has ways it controls what is deducted or not, just ask.) or 2) change payroll processing companies.
One other things, we change our life insurance coverage for our employees once a year, at the time of contract renewal. We don't do it each time there is a salary change. That would be a pain. However, you have to control your life insurance policy contract to word it this way.
Please let me know if you have any questions. I will be glad to provide you with a sample spread sheet I use (just to double check the amount taken and for otehr things.) [email]ewarthen@newcombspring.com[/email]