Calculating Life Imputed Income

Question:


How does PeopleSoft calculate the imputed income on group term life? Is the $50,000 limit on a table or is it part of the payroll calculation process (COBOL)?



Answer:


Let's try to understand what is Imputed Income when tied to Group-Term Life Insurance?

Imputed income is like a conceptual income.The value of the first 50,000 USD of group-term life insurance that a employer provides to a U.S. employee is not considered taxable income. The value of coverage in excess of 50,000 USD (computed according to Internal Revenue Service [IRS] regulations) minus premiums that the employee pays with after-tax dollars, is considered taxable income and is subject to social security and Medicare taxes. Although you must report the amount as taxable income on the employee’s Form W-2, the value of excess group-term life insurance coverage is not subject to federal income tax withholding.

i.e. premium amounts for life insurance in excess of $50,000 in coverage are considered taxable income. This conceptual income is added to the employee’s gross wages, and the employee is taxed on this amount.

For Example:

If an employee who makes 40,000 USD a year is enrolled in a group term life benefit plan of two times salary, that employee receives 80,000 USD in life insurance. The premium amount for this excess 30,000 USD is considered taxable compensation. The value of this excess group term life insurance premium is considered imputed income.

To calculate imputed income for all group-term life plans (except dependent life) the system performs the following processes when you run the Pay Calculation COBOL SQL process (PSPPYRUN):

1. Determines the total life insurace coverage for the employee, including both employer and employee paid coverage for all plans in which the employee is enrolled.

2. Substracts $50,000.00 from the total coverage (i.e. first 50,000.00 is not taxable per IRS). if the resulting amount is greater than Zero, then the cost of the coverage for that amount is considered taxable. PeopleSoft Payroll will use this cost to calculate the Imputed Income.

3. Uses the IRS Uniform Premium table. the data for this table is stored on the IRS Age Graded Rate table in the Benefit Rate (IRS as the Rate Table ID in Version 9.0). This table is maintained by PeopleSoft, and should not be changed .The age is based on the age as of December 31 of the year in which the benefit is taxable. There is no need to enter the IRS rate table in the Benefit Deduction Program table, because the system uses it automatically.

4. Substracts any employee paid after-tax constributions to the coverage. The resulting amount is considered taxable. This is the amount that will be added to the Employee's taxable gross.

IRS Uniform Premium table:

Example of Imputed Income Calculation:

An employee might be liable for imputed income, even if there is no employer contribution on all of the life insurance plans. If the employee has more than one type of life coverage, the system calculates imputed income in an iterative manner.

For example, Robert, age 60, has basic life (employer- and employee-paid) and supplemental life (employee-paid):

Plan Type	Description	Coverage	Premium
20	Life	150,000 USD	Employer-paid premium: 49 USD Employee-paid premium: 10 USD
21	Supplemental life	200,000 USD	Employer-paid premium: 0 USD Employee-paid premium: 100 USD

Robert is paid monthly. The following illustrates how the system calculates Robert’s paycheck deductions:

The system calculates the basic life plan:

1. Determine the total coverage for basic life: 150,000 USD

2. Calculate the amount that is subject to imputed income by subtracting 50,000 USD from the total coverage:

3. 150,000 USD – 50,000 USD = 100,000 USD subject to imputed income.

4. Apply the IRS Uniform Premium table.

Robert is 60 years old. In this age bracket, the Uniform Premium table calls for a calculation of 1.17 USD per month per 1,000USD of coverage: 100,000 USD / 1,000 USD x 1.17 USD = 117.00 USD

5. Subtract employee-paid, after-tax contributions to the coverage:

6. 117 USD – 10 USD = 107 USD taxable benefit.

7. The system calculates the supplemental life plan:

8. Determine the total coverage:

9. 150,000 USD basic life + 200,000 USD supplemental life = 350,000 USD total coverage.

10. Subtract 50,000 USD from the total coverage to determine the imputed income:

11. 350,000 USD – 50,000 USD = 300,000 USD subject to imputed income.

12. Apply the IRS Uniform Premium table.

13. Robert’s age of 60 calls for a calculation of 1.17 USD per 1,000 USD of coverage.

14. 300,000 USD / 1,000 USD x 1.17 USD = 351.00 USD.

15. Subtract employee-paid, after-tax contributions to the coverage

16. 351 USD – 110 USD = 241 USD total taxable benefit.

17. The system subtracts the initial 107 USD taxable benefit for basic life from the 241 USD total taxable benefit to determine the supplemental life taxable benefit:

v18. 241 USD – 107 USD = 134.00 USD.

19. Robert’s Paycheck Deduction record displays:

Plan Type	Tax Class	Amount
Life	After-Tax	10 USD
Life	Nontaxable Benefit	49 USD
Life	Taxable Benefit	107 USD
Supp (supplemental)	After-Tax	100 USD
Supp	Taxable Benefit	134 USD

Where is the 50,000 Limit coming from? is it in a table or in the process itself?

Well, if you look at the PSPDCLIF.cbl (part of Pay Calc Process), here's where the limit amount is taken into consideration. It is hard coded in the Cobol Program.