Main Menu Name: Table 2001
Determines the amount an employee must include in his reportable income as the result of certain life insurance coverage supplied by an employer or under a qualified retirement plan. If the actual rate charged for one year term insurance to standard risks is lower than the table rates, the lower rate may be used by replacing the table rate.
In this article:
The cost of life insurance protection provided under a split dollar plan or under a qualified pension, annuity, or profit-sharing plan is treated as a current economic benefit (the equivalent of cash) made available to the employee by the employer or as a distribution by the pension or profit-sharing trust.
The value of this currently reportable benefit must be included in the employee's gross income for the year in which the premium is paid. This rule is applicable even if the policy is on the life of a third party. For example, a shareholder might enter into a split dollar agreement under which he insures the life of a co-shareholder to fund a buy-sell agreement.
The employee is taxed currently only on the "net amount at risk," i.e., on the cost of the life insurance protection actually provided on behalf of the employee. This cost is found by multiplying the one year term premium rate at the insured's attained age (age on birthday nearest the beginning of the policy year) in the government's table (2001) by the difference between (a) the face amount of insurance and (b) the cash surrender value at the end of the policy year.
As noted above, if the insurer's rates for individual one year term policies available to all standard risks (initial issue insurance) are lower than the table rates, the lower rates may be used. But, so-called "fifth dividend option" rates may not be used. No extra charge is imposed on substandard insureds; the same table rates that apply to standard risks are used for employees who are insurable only at substandard ratings.
If an employee under a split-dollar plan receives dividends, they may constitute additional compensation. The general rules are:
- Dividends received in cash are taxable.
- Dividends used to purchase one-year term insurance under the fifth dividend option are taxable.
- Dividends applied to purchase paid up life insurance are taxable if the employee has a non-forfeitable interest.
- Table 2001 (P.S. 58) cost, or yearly renewable term cost if lower, is reportable if dividends are used to purchase paid up additions and the employer is entitled to the cash surrender value and the employee's beneficiary receives the balance of any death benefit.
- If dividends are left on deposit and the employee is given a non-forfeitable right to those amounts, the dividend must be included in the employee's income.
- If dividends are used to reduce the premium, they are not included in the employee's income.
The value of all economic benefits received by the employee in the tax year (Table 2001 value for the life insurance protection plus the dollar value of dividends received by or paid for the benefit of the employee) are aggregated. Then the payment made by the employee (or other policy owner) is subtracted from the total value of the economic benefits provided. The balance, if any, is the amount the employee must report as income.
If the employee's portion of the premium for a given year is greater than the value of the benefits he receives in that year, the excess can never be carried over. It is lost.
Note: If the insurer's rates for individual one-year term policies available to all standard risks (initial issue insurance) are less than the P.S. 58 rate, the insurer's rate may be used. "Fifth dividend option" rates, however, may not be used.
Life insurance protection supplied under a split-dollar plan or under a qualified pension, annuity, or profit-sharing plan is considered a current economic benefit (the equivalent of cash) provided to an employee by the employer or as a distribution by a pension or profit sharing trust.
The employee is required to add the value of this benefit to his gross income for the year in which the premium is paid. This policy applies even if the insurance is on the life of a third party.
The employee pays tax on the cost of the life insurance protection provided on his behalf. This amount is calculated by:
- Finding the difference between the face amount of insurance and the cash surrender value at the end of the policy year, and then,
- multiplying that amount by the one-year term premium rate at the insured's attained age in the government's Table 2001.
Additional compensation may apply to an employee who receives dividends under a split-dollar plan. The rules are as follows:
- Dividends paid in cash are taxable.
- Dividends used to buy one-year term insurance under the fifth dividend option are taxable.
- Dividends used to purchase paid up life insurance are taxable if the employee has a non-forfeitable interest.
- P.S. 58 cost (or yearly renewable term cost if lower) is reportable if dividends are used to buy paid up additions and the employer is entitled to the cash surrender value and the employee's beneficiary collects the balance of any death benefit.
- If dividends are left on deposit and the employee has a non-forfeitable right to them, the dividends must be added to the employee's income.
- If dividends are used to decrease the premium, they are not added to the employee's income.
The inputs under Part A must be entered. The inputs under Part B are entered if dividends are paid to or for the benefit of the employee.
- Employee's Age: Enter the employee's attained age on the birthday nearest the beginning of the policy year. Valid inputs are 15 to 81.
- Death Benefit Face Amt.: Enter the face amount of the death benefit.
- Cash Value to Employer: Enter the cash value going to the employer.
- Employee's Contribution: Enter the amount contributed by the employee. If the employee did not contribute, enter 0.
If dividends were paid, the following inputs must be entered.
- Employee Paid in Cash: Enter the amount of dividend paid in cash to the employee.
- Used to Reduce Premium: Enter the amount of dividend used to reduce the premium.
- Hold for Employee: Enter the amount of dividend left on deposit for the employee.
- Employee Controls Cash Val./Death Benefit of Paid Up Additions: Enter the amount used to purchase paid up additions.
- If Dividends Used to Buy 1-Year Term Insur. for Employee: Enter the amount of dividend used to purchase a one-year term of insurance for employee.
The program shows the Net Amount at Risk, finds the appropriate Table 2001 charge, and uses it to calculate the Gross Amount Includible. It then subtracts the employee's contribution and adds the dollar value of any dividends paid to the employee for his benefit to calculate the Reportable Table Cost.