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The Internal Revenue Service classifies all life insurance coverage
over $50,000 as a fringe benefit subject to taxation. The amount of
life insurance coverage is not taxable but rather the premium required
to pay for the life insurance coverage is taxable. Chapter 62, P.L.
1994 permits members of the State retirement systems to waive their
Noncontributory Group Life Insurance over $50,000 to avoid a possible
federal and State tax liability on that benefit. Any member who waives
the Noncontributory Group Life Insurance, must waive the total amount
of noncontributory coverage in excess of $50,000. Waivers of partial
amounts are not permitted. Even if a member waives the Noncontributory
Group Life Insurance over $50,000, there still may be a federal tax
liability for those PERS and TPAF members who have Contributory Group
Life Insurance coverage.
The cost of
insurance coverage in excess of $50,000 is determined using premium
rates provided by the Internal Revenue Service. The premium rates
are summarized below:
Annual Cost Per $1,000
of Coverage
|
Age
|
Premium
|
| Under
25 |
$0.60 |
| 25-29
|
0.72 |
| 30-34
|
0.96 |
| 35-39
|
1.08 |
| 40-44
|
1.20 |
| 45-49
|
1.80 |
| 50-54 |
2.76 |
| 55-59 |
5.16 |
| 60-64 |
7.92 |
| 65-69 |
15.24 |
| 70
and above |
24.72
|
Determining
the Taxable Amount For Members who have both Contributory and
Noncontributory Group Life Insurance
To determine the
taxable amount, if any, add the amount of your noncontributory life
insurance coverage to your contributory life insurance coverage (PERS
and TPAF members only) then subtract $50,000 from that total. The
premium rates are then applied to the remaining life insurance amount.
The premium costs for the life insurance are determined by the IRS
based on your age (see chart) and the life insurance in excess of
$50,000. The premiums you pay for your contributory life insurance
coverage (.005 of base salary for PERS, .004 for TPAF) are subtracted
from the premium costs determined by the IRS. The remaining premium
cost (if any) is the taxable amount and is added to your W-2 for that
year.
Example:
- A PERS member
is age 56 and has both contributory and noncontributory life insur-ance
for a total coverage of three times salary (three and one-half
for TPAF members).
- The member's
annual base salary is $60,000.
- The member's
life insurance coverage totals $180,000 (3 x $60,000).
- The fringe
benefit amount is determined by subtracting $50,000 from the total
benefit amount, $180,000. That equals $130,000.
- According
to the IRS, the premium cost for an individual 56 years of age
is $5.16 per $1,000 of coverage. The premium cost in this example
is $670.80 (130 x $5.16).
- Under PERS,
members pay premiums equal to .005 of base salary for contributory
life insurance coverage. In this example this member pays $300.00
(.005 x $60,000) per year for life insurance coverage.
- The net
taxable value of the premiums is $370.80 ($670.80 - $300.00) and
would be added to this member's W-2. This does not mean that the
member would pay an additional $370.80 in taxes, but that $370.80
would be added to the member's taxable wages for the year.
- The member's
noncontributory life insurance coverage equals $90,000 (1½ x $60,000).
In this example the member could waive $40,000 of noncontributory
life insurance coverage because members are only permitted to
waive noncontributory life insurance coverage over $50,000.
The net taxable value would be reduced to $164.40 ($464.40 - $300.00).
Determining
the Taxable Amount For Members who have
Noncontributory Group Life Insurance Only
Members of the
PFRS, SPRS, JRS and ABP do not pay for their life insurance coverage.
They have noncontributory life insurance coverage. In addition, members
of PERS and TPAF who have dropped their contributory life insurance
coverage, have noncontributory life insurance coverage. To determine
the taxable amount, if any, take the amount of your noncontributory
life insurance coverage and subtract $50,000 from it. The premium
rates are then applied to the remaining life insurance amount. The
premium costs for the life insurance are determined by the IRS based
on your age (see chart) and the life insurance in excess of $50,000.
The premium cost of the remaining life insurance amount is the taxable
amount and is added to your W-2 for that year.
Example:
- A PFRS or
SPRS member is age 53 and has noncontributory life insurance of
three and one-half times salary.
- The member's
annual base salary is $60,000.
- The member's
life insurance coverage totals $210,000 (3½ x $60,000).
- The fringe
benefit amount is determined (see above) by subtracting $50,000
from the total benefit amount, $210,000. That equals $160,000.
- According
to the IRS, the premium cost for
an individual 53 years of age is $2.76 per $1,000 of coverage.
The premium cost in this example is $441.60 (160 x $2.76) and
would be added to this member's W-2. This does not mean that the
member would pay an additional $441.60 in taxes but that $441.60
would be added to the member's taxable wages for the year.
- The member's
noncontributory life insurance coverage equals $210,000 (3½ x
$60,000). In this example the member could waive $160,000 of noncontributory
life insurance coverage because members are only permitted to
waive noncontributory life insurance coverage over $50,000. The
net taxable value would be reduced to $0.00.
Waiving Noncontributory
Group Life Insurance over $50,000
You may waive your
Noncontributory Group Life Insurance coverage by completing a waiver
form and submitting it to the Division of Pensions and Benefits. The
waiver form must be received by the Division of Pensions and Benefits
before December 31 to be effective January 1 of the next calendar
year. Once a waiver form has become effective it shall be irrevocable
for the entire calendar year. The waiver will remain in effect until
you submit a reinstatement form to the Division of Pensions and Benefits.
The reinstatement will become effective the following January 1.
Waiver and
reinstatement forms are available from the Division of Pensions
and Benefits or from your employer.
If a waiver
is in effect at the time of termination of employment or retirement,
you will not be permitted to convert any amount of your Noncontributory
Group Life Insurance coverage over $50,000.
Before completing
the waiver, you should completely understand the ramifications of
waiving your noncontributory life insurance. For more information,
refer to Internal Revenue Service Publication 525.
The Division
of Pensions and Benefits will notify you and your employer upon
receipt of the waiver or reinstatement form.
Withdrawal
from Contributory Group Life Insurance
(PERS and TPAF only)
You may withdraw*
from contributory life insurance coverage at any time by completing
a Notice of Withdrawal from Contributory Group Life Insurance
form which is available from the Division of Pensions and Benefits
or your employer. Unlike waiving your noncontributory life insurance
coverage over $50,000, which can be reinstated annually, the withdrawal
from contributory life insurance is irrevocable.
*Note:
New enrollees in PERS and TPAF are still required to retain the
total amount of their contributory group life insurance during the
first year of membership.
Amount
of Death Benefits
|
Fund
|
Contributory
|
Noncontributory
|
| PERS |
1½ x base
salary |
1½ x base
salary |
| TPAF |
2 x base
salary |
1½ x base
salary |
| PFRS |
none |
3½ x base
salary |
| SPRS |
none |
3½ x base
salary |
| JRS |
none |
1½ x base
salary |
| ABP |
none |
3½ x base
salary |
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