Question

An employer provides all of his employees with life insurance protection equal to twice the employee’s annual salary. Melba, age 42, has an annual salary of $70,000. Is Melba required to recognize income even though she is still alive at the end of the year and thus nothing has been collected on the life insurance policy? Explain.

Answer 1

Yes, Melba must include $108 in her total gross income.

Step-by-step explanation:

If the insurance coverage exceeds $50,000, the employee must include the excess cost of the policy in his/her gross income as deemed premiums paid.

Melba's insurance coverage is $140,000 (= $70,000 x 2), which exceeds the $50,000 threshold by $90,000. So Melba must include in her total gross income the cost of the premiums on $90,000. The IRS provides a table to calculate this amount, and since Melba is 42 years old, her monthly premium should cost $0.10 for every $1,000.

Melba's extra premium cost = ($90,000 / $1,000) x $0.10 per month x 12 months = $108