Group Term in Cafeteria Plan

[Lar Jep]

Can any one explain the differences in tax treatments for this?:
100,000 group term life
Situation 1 = employer pays all
Situation 2 = employer pays for 50,000, employee pays next 50,000 voluntary

Both situations in cafeteria plan.

[micaelagb]

Can any one explain the differences in tax treatments for this?:
100,000 group term life
Situation 1 = employer pays all
Situation 2 = employer pays for 50,000, employee pays next 50,000 voluntary

Both situations in cafeteria plan.

If the prem. is $0.10 per $1K, then total premium for the first $50K is $5 and the premium for the second $50K is also $5.

In situation 1, the second $5 (the premium for amounts over $50K face amount) is taxable income to the employee--they may be charged $1.25 or something as income tax.
In the second situation, that's not a qualified benefit of a cafeteria plan, is it? Check out Rosenbloom p 989.

I suppose you could have $50K in the cafeteria plan, and another $50K available outside of the cafeteria plan, payable by ee payroll deduction. Then the ee would pay the whole $5 prem. from after-tax income.

[The Head Detective]

I thought only the first $50K was qualified even in a cafeteria plan. I.e. I think it can still be considered part of the cafeteria plan, but the portion above $50K is still taxable.

I've gone over this section within the last few days, but I could be wrong. I need to check the book, and will do so when I get home this afternoon.

[micaelagb]

I thought only the first $50K was qualified even in a cafeteria plan. I.e. I think it can still be considered part of the cafeteria plan, but the portion above $50K is still taxable.

I've gone over this section within the last few days, but I could be wrong. I need to check the book, and will do so when I get home this afternoon.

Employer-pay-all group term life is a qualified benefit in a cafeteria plan. Only the premium on the first $50K is non-taxible to the ee. Premium for amounts in excess of $50K is imputed income to the ee, I think, but still a qualified benefit of the cafeteria plan.

EE-paid life isn't a qualified cafeteria plan benefit at all.

Edited to add: I love these discussions! They really help solidify the material in my head--thanks guys! Let's keep it up!

[The Head Detective]

Edited to add: I love these discussions! They really help solidify the material in my head--thanks guys! Let's keep it up!

Agreed.

Also, you are correct regarding employer/employee paid life.

[The Head Detective]

Afterthought: doesn't "qualified" pretty much mean "non-taxable"?

OK. Now I actually have to try to get some work done.

[BuckyBadger]

Afterthought: doesn't "qualified" pretty much mean "non-taxable"?


No... I believe a benefit can qualify for a cafeteria plan but still be taxable. Paid time off would be an example of this.

[BuckyBadger]

Can any one explain the differences in tax treatments for this?:
100,000 group term life
Situation 1 = employer pays all
Situation 2 = employer pays for 50,000, employee pays next 50,000 voluntary

Both situations in cafeteria plan.

I thought the forumla that applies here is

(Life Insurance Amount - 50K) * table 1 rate - EE paid premium.

So in situation 1, the taxable amount would be 50K * table 1 rate

In situation 2, the taxable amount would be 50K * table 1 rate - EE paid premium (which is likely to be 0).

Or am I misapplying this forumla?

[micaelagb]

I thought the forumla that applies here is

(Life Insurance Amount - 50K) * table 1 rate - EE paid premium.

So in situation 1, the taxable amount would be 50K * table 1 rate

In situation 2, the taxable amount would be 50K * table 1 rate - EE paid premium (which is likely to be 0).

Or am I misapplying this forumla?

I think that would be applicable to regular ee-paid voluntary group life, which is not a part of a cafeteria plan.

And the ee would be paying the whole prem in Scenario 2 (not in a cafeteria plan) from post-tax income, so there's that tax aspect, too.

All this is applicable to the US, of course. Can't forget Canada! (and haven't checked that out, yet, either...)

[Lar Jep]

Good discussion. The qualifying term is still somewhat unclear. I think this is the fault of the text. Sometimes the phrase "cash and qualified benefits" is used, implying to me they are distinct, while other times cash is explicitly exclude from the list of non-qualified benefits. I normally think of qualified as non-taxable.
Another area of fuzziness, page 1006 says that group term over 50,000 is not subject to FUTA, FICA, and income tax, but is to SS and Medicare taxes. I think this only applies to the employee and the employer still is exempt from all, but I can't tell for sure.

This is probably too much analysis, but still helpful I think.