How do I handle the $50,000 limitation on tax-free life insurance coverage?
The $50,000 limit applies to employer-provided coverage, and any premiums paid by the employee under a Premium Conversion Plan are considered to be provided by the employer. Therefore, you need to include any employer-provided coverage when you evaluate coverage levels. You have two choices. Either the employees must pay income taxes on the actual premiums or on the imputed value of any coverage over $50,000. The first option may be easy if coverage is purchased in fixed amounts, like in $10,000 increments. The premiums for coverage over $50,000 could then be paid with after-tax payroll deductions. If the amount of coverage is not offered in fixed increments, as in a “times salary” plan, the process is more difficult. For example, if the employer provides life insurance coverage equal to the employees’ annual salary, lower paid employees (below $50,000) would have no taxes due on the premiums. If the employee earns $60,000 per year, the first $50,000 is tax-free, but the employee must
