HR Fast Facts: How to Calculate Imputed Income for Life Insurance

Imputed income amounts for Basic and Voluntary Life plans are calculated using the volume of coverage on the plan (V) and an age-banded rate (r), which is determined by the IRS using the employee’s age on the last day of the employee’s tax year.

Imputed Income amount (per month) = ((V-$50,000) / 1000) * r

Both V and r can change throughout the plan year according to the carrier’s rate redetermination schedule.

Example

Basic Life Plan

A 45-year-old employee receives $200,000 of Basic coverage which is paid entirely by his employer. His imputed income for this coverage is $270, which is entered into boxes 1, 3, 5 of the employee’s W-2, and in box 12 with a code “c”.

Excess coverage = 200,000 - 50,000 = $150,000
 Monthly imputed income = (150,000 / 1000) * .15  = $22.50
 Yearly imputed income = 22.50 x 12 = $270

Voluntary Life Plan

A 45-year-old employee pays $100 per year for $200,000 in Voluntary Life insurance. The $200,000 of coverage is reduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($ 0 .15 x 150 x 12), and is reduced by the $100 he pays for the insurance, $170 total. The employer includes $170 in boxes 1, 3, and 5 of the employee’s W-2, and in box 12 with code “C.”

Please refer to this IRS page and subsequent publication for more information. You will need to consult with a Tax Professional if you have any specific questions about how Imputed Income is calculated.