Hello, we offer life insurance as a benefit. the plan is not group term life insurance policy. The business is located in NJ.
Please advise as to the taxabilty of the benefit- both for State and Federal.
Probably the cost of the policy if we are talking term. Whole life is more complicated since there is both a savings and an insurance component which have to be looked at. I seem to remember The Payroll Source Book had pages of instructions on this stuff.
Agree with David, The general valuation rule is that taxable fringe benefits are valued at their fair market value - meaning the amount it would cost the employee to obtain the benefit from a third party (which is not necessarily the employer's actual cost or what the employee thinks the benefit is worth). However, Life insurance that does not qualify as group term life insurance is discussed in Reg 26 CFR 1.61-2(d)(ii)(A).The reg discusses several types of policies, including policies covered by special rules we won't get into here such as policies incidental to qualified plan or annuity contracts and split-dollar policies, but the general rule is that the cost of the policy to the employer is included in the employee's gross income. No mention of fair market value, but the actual cost to the employer.
In the words of the regulation,"Generally, life insurance premiums paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of such employee are part of the gross income of the employee." On that basis, it should not matter whether the policy is a term policy or a whole live policy, or an accidental death (flight insurance) policy, The employee has effectively paid the premiums with after tax dollars so the death benefits and savings belong to the employee. In addition, any dividends paid to the employee are not taxable income to the employee. The dividends are a return of excess premium charges by mutual insurance companies and are not taxable as they are in the nature of a return of principal rather than income to the employee.
Employer paid premiums on qualified group term life insurance do not create an issue regarding death benefits because the cost of employer provided GTL is included in the employee's gross income to the extent the premiums exceed the premiums on $50,000 of the insurance plus any amounts paid by the employee. That is, the employee is paying for the taxable value of the insurance premiums either with after tax dollars or by paying tax on any excess premiums.
"Insurance", even "life insurance" can be just about anything. The Payroll Source Book had types I had never heard of. Mechanically term and whole life are not too difficult, but start throwing in policies on your gold fish and ex-wives, plus "key man insurance" for your policy and you can end up with one of those 200 hundred page small print policies that God would have trouble understanding. Some states require a single page summary written in English which has everything payroll (and IRS) needs. Some states do not. The more things you add to the policy the messier it gets.
Term is (generally) the cost of the policy. Whole life has to be split between the term value of the policy and increase in valuation of the saving component. Which do not have to total the premiums. Fun times. But start including other types of insurance in there, you had better hope you are in a state which requires that summary page. These custom policies tend to be written for the brass. I had one which took out life insurance on the horses as part of the policy. Hopefully you are a big fan of Excel.
Not the question, but non-stupid companies start with the IRS approved $50K limit GTL, then have optional portable term life insurance paid with employee post tax dollars for anyone who wants it. Anything more complicated is the brass only. Maybe whole life, maybe key man, maybe both. But if the insurance company can write the policy they can give you a good one page IRS friendly summary no matter what state they are in. The brass wants to see it so it does not look like they are doing payroll favors, which is against the brass rules. Somewhere there is a Very Senior Management handbook which says that they are supposed to p*** on payroll at all time and call it rain. You have to trick them into requesting the things you need to do your job.