For employees enrolled in both a life insurance plan and a Accidental Death & Dismemberment (AD&D) plan, imputed income applies only for the volume of the life insurance plan.
Imputed income is the cash value for benefits that an employer pays on the employee’s behalf. As it relates explicitly to group life insurance plans, it is the value of the plan’s payout above $50,000. Unless the Accidental Death & Dismemberment (AD&D) coverage is bundled with the group life policy, imputed income is not a factor for that benefit.
What is imputed income for life insurance and AD&D plans?
Imputed income is related to benefits and perks an employee receives that may have cash value, but they don’t have to pay for. If you offer your employees a company-paid group life insurance benefit, for example, you must report any amount of the policy greater than $50,000 that covers that specific employee.
So, if your plan covers an employee at 1x their base salary and their gross base salary is $75,000 per year, $25,000 of that policy would be used to perform the calculation against the IRS’ tables. This would identify the actual amount of imputed income that must be reported.
Similarly, if the policy bundles the group life at 1x the employee’s salary, and the accidental death and dismemberment policy has a similar maximum payment potential, the imputed income calculation would be limited to the $25,000 discussed above. In that case, the two plan values do not need to be combined to calculate the imputed income.
Company-paid AD&D plan values are not considered imputed income because of the:
- Nature of the plan
- Various levels of payment depending on the specific injury
It is critical to point out that it is not the value of the life insurance policy’s annual premium paid on the employee’s behalf but the value of the potential payout benefit.
Why is imputed income for life insurance and AD&D plans important for my business?
You need to understand the importance of imputed income because it means the difference between correctly and incorrectly reporting this portion of your business’ and employees’ taxes. Life insurance policy values are not the only area where benefits and perks are considered imputed income. Some additional examples include:
- Adoption assistance over a certain tax-free maximum
- Any non-business use of an employer-provided cell phone
- Care assistance for an employee’s dependents over a certain tax-free maximum
- Employee education assistance over a certain tax-free maximum
- Gym memberships or other fitness-related perks
- Moving expenses that aren’t tax-deductible
- Non-bonus cash and gift cards (bonus tax is separate from imputed income tax)
- The addition of an employee’s non-dependents to their employer-paid health insurance plan
- Transportation benefits above employer and employee pretax deferrals under a Section 132 Plan
- Vehicles you provide to your employees (whether you own or lease them) for regular non-business use
The consideration of the imputed income of these additional benefits results in a total compensation, or total rewards amount you are actually paying the employee. Few team members understand the significant value these perks give them.
Your ability to capture this information and provide a total rewards statement that includes their cash compensation along with their imputed income value can be an eye-opening experience. This is not to downplay the importance of their cash compensation—base salary and bonuses—or to imply it can be lessened below competitive market values. It is intended, however, to give you the ability to add an exclamation point to the value you place on them and their contribution to your company.
History of imputed income for life insurance and AD&D plans
Imputed income made its first public appearance during a nasty divorce case in 1948. However, because of the income level involved in that legal case, it wasn’t generally considered relevant in everyday business. That is until 1995 when the IRS decided you must include this information on your tax forms for certain provided benefits and perks.
Taxation of imputed income was established for multiple reasons:
- Make sure employers were intentional with the amount of insurance coverage they offered their employees
- Keep life insurance payouts lower
- Increase tax income base amounts to adjust for the lower tax rates that had been applied
The calculations associated with imputed income keep actuaries in business as they are very complex and based on multiple-tiered factors.
Consider imputed income for life insurance and AD&D plans as an employer
Imputed income is directly related to the monetary value associated with specific benefits an employer provides an employee. Group life insurance plans that are paid by the employer are typically included in imputed income calculations. Calculating imputed income means correctly reporting this portion of your business’ and employees’ taxes.
HR glossary terms you must know
- Tangible rewards: Material rewards that can easily be assigned a monetary value and are given to employees to thank them for their contributions. Examples include gift cards, gym memberships, food baskets, cash bonuses, and merchandise.
- Bonus: A bonus is a non-guaranteed payment given to employees outside their regular pay.