FOR GROUP BENEFITS

GP-TXTL-WPR002

Tax reporting guidelinesfor life benefitsA guide for employers

Tax Reporting/Life Benefits

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Taxes prior to a life claim being received: Imputed incomeGroup term life insurance is classified by the Internal Revenue Service as a fringe benefit for employees. The Internal Revenue Code Section 79 allows up to $50,000 of group term life insurance coverage to be provided under a policy. If the insured employee’s group life benefit amount is over $50,000, then the benefit is considered an excessive fringe benefit. The value of coverage in excess of $50,000 must be included as part of the employee’s income; the taxable value of this excess coverage is called “imputed income.” The imputed income amount is determined by using the IRS Premium Table. The IRS Premium Table from IRS Publication 15-B, available at www.irs.gov, indicates that the employer must report the imputed income as wages in boxes 1, 3, and 5, and show it in box 12 with code “C” of the employee’s Form W-2. The income is subject to Social Security and Medicare taxes.

Cost per $1,000 of protection for 1 month (2011 rates: Table 2-2 from IRS Publication 15-B)

Age Cost

Under 25 $0.05

25 through 29 $0.06

30 through 34 $0.08

35 through 39 $0.09

40 through 44 $0.10

45 through 49 $0.15

50 through 54 $0.23

55 through 59 $0.43

60 through 64 $0.66

65 through 69 $1.27

70 and older $2.06

Calculating imputed income. You can figure the monthly cost of the insurance to include in the employee’s wages by performing the following steps.

1. Compute the taxable benefit amount: Determine the amount of taxable coverage by taking the coverage amount rounded to the nearest $100, minus $50,000 = amount of taxable coverage. (You do not need to include accidental death & dismemberment coverage amounts.) Amount of taxable coverage/1,000 = taxable benefit amount.

2. Use IRS Publication 15-B Table 2-2 to identify the cost based upon the insured employee’s age on the last day of the tax year.

3. Multiply the taxable benefit amount times the cost based upon the employee’s age to compute the monthly cost.

4. Figure the total cost to include in the employee’s wages by multiplying the monthly cost by the number of full months’ coverage at that cost. Prorate the cost from the table if less than a full month of coverage is involved.

5. Subtract the amount the employee contributed to the cost of the coverage. This is the amount of imputed income for the employee.

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Coverage for dependents. Group term life insurance coverage paid by the employer for the spouse or dependent of an employee may be excludable from income if the face amount is not more than $2,000. If the face amount is greater than $2,000, the entire amount of dependent coverage must be included in income unless the amount over $2,000 is purchased with employee contributions on an after-tax basis.

Please refer to your tax advisor and/or IRS Publication 15-B for full details regarding imputed income requirements. This can be accessed at www.irs.gov.

Example — Jill’s employer provides her with group term life insurance coverage in the amount of $150,000. Jill is 39 years old, is not a key employee, and pays $65.00 per year toward the cost of the insurance. To determine how much should be included in Jill’s wages, the employer will do the following:

Coverage amount $150,000 Minus allowed amount of coverage – $ 50,000 Amount of taxable coverage $100,000

Determine the cost per $1,000: $100,000/1,000 = $100 taxable benefit amount

Cost for 1 month of coverage for a 39-year-old from IRS Table 2-2 is $0.09 Cost for 1 month of the taxable benefit amount is 100 x 0.09 = $9.00 Cost for 1 year of coverage is $9.00 x 12 months = $108.00

Amount that Jill has paid toward coverage: $65.00 Amount that is reportable as imputed income for Jill: $108.00 – $65.00 = $43.00 Jill’s employer will increase her reported income by $43.00 in boxes 1, 3, and 5 of her Form W-2. The employer also enters $43.00 in box 12 with code “C.”

SecureLine Account The SecureLine Account is a benefit payment option that can be elected by the beneficiary. The beneficiary’s SecureLine Account starts earning interest as soon as the account is created. All interest earned could be considered taxable income. The account holder will be issued a 1099INT after the end of each tax year as long as the account remains open and earns more than $10 in interest in that tax year.

Form 712 An IRS Form 712 may be required when filing the tax return for the deceased’s estate. If a Form 712 is required after a life claim payment, please contact the benefit specialist who processed the claim to have a Form 712 issued. The Form 712 may be requested by the beneficiary or the person representing the deceased’s estate.

Accelerated Death Benefit (Living Benefit)Most group life policies include a provision for an Accelerated Death Benefit, also referred to as a Living Benefit. An insured employee may become eligible for this benefit if the employee is terminally ill with a life expectancy of 12 months or less.

An insured should speak with his or her tax representative to determine if payment of an Accelerated Death Benefit would be considered income and will have an impact on the insured’s state taxes or receipt of welfare programs.

If an insured receives payment of an Accelerated Death Benefit, a 1099LTC will be issued during the January following the year in which the claim payment occurred.

Jill Smith is the beneficiary of a group term life insurance policy for $50,000, and interest in the amount of $30.25. The interest is taxable; however, since this interest payment is less than $600, a 1099INT would not be created.

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John Smith is the beneficiary of a group term life insurance policy for $250,000, and also receives interest in the amount of $725.25. Because this interest payment is more than $600, a 1099INT would be reported and mailed to him after the end of the tax year.

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Interest incomeLife insurance benefits are not taxable for the policy benefit amount paid. However, if state-mandated interest becomes payable on a claim, then this interest is considered income and can be taxable. If the interest paid on a claim is $600 or more, a 1099INT form will be mailed to the beneficiary after the end of the year in which the claim payment occurred.

Examples:

Taxes after a life claim is paid

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Extension of Death Benefit (Life Waiver of Premium)An insured employee may qualify for the Extension of Death Benefit, also referred to as Life Waiver of Premium, if the insured becomes disabled. This provision is included in most policies and allows for certain life coverages to continue without the payment of premium as long as the insured meets the policy definitions of total disability as well as other eligibility requirements.

Because there is no benefit payment occurring, no tax forms are issued for qualifying for the Extension of Death Benefit.

Permanent Total Disability BenefitOccasionally, a group life policy will include a provision for a Permanent Total Disability Benefit. This benefit becomes payable if an insured becomes totally disabled. If an insured qualifies, the life insurance benefit is paid out while the insured is still living.

An insured should speak with his or her tax representative to determine if payment of a Permanent Total Disability Benefit would be considered income and will have an impact on the insured’s state taxes or receipt of welfare programs.

If an insured receives payment of a Permanent Total Disability Benefit, a 1099LTC will be issued after the end of the tax year.

Survivor Income BenefitOccasionally, a group life policy will include a Survivor Income Benefit. This is a monthly recurring benefit paid to the insured’s surviving spouse and/or children. Payment of this benefit is considered revenue to a beneficiary, and a portion of the payment is taxable.

If a beneficiary receives payment of a Survivor Income Benefit, a 1099R will be issued after the end of the tax year.

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The foregoing represents Lincoln’s interpretation of the federal tax laws that apply to this product, and is provided for informational purposes only. The foregoing does not constitute tax advice, and any person purchasing, providing or receiving coverage or benefits under this product should consult an independent tax advisor to determine how such coverage and benefits should be treated for income tax purposes.

Insurance products (policy series GL1101) are issued by The Lincoln National Life Insurance Company (Fort Wayne, IN), which does not solicit business in New York, nor is it licensed to do so. In New York, insurance products (policy series GL1101) are issued by Lincoln Life & Annuity Company of New York (Syracuse, NY). Both are Lincoln Financial Group® companies. Product availability and/or features may vary by state. Limitations and exclusions apply.

Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.

Affiliates are separately responsible for their own financial and contractual obligations.

©2011 Lincoln National Corporation

www.LincolnFinancial.com

ECG 12/11 Z02 Order code: GP-TXTL-WPR002

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