Living longer turns out to have a tax benefit.
Last month, the Internal Revenue Service finally acknowledged Americans' longer life expectancies by lowering the taxable income it attributes to workers who have employer-paid group term life insurance.
The change will not be a bonanza for anyone, but it will put a few more dollars into the pockets of some workers, especially older ones. Annual savings will typically run from a few dollars to about $100.
"It isn't as though this is going make anybody [able] to buy a yacht," said Martha Priddy Patterson, a benefits expert at the accounting firm KPMG LLP. "But [the tax] has been hitting people who in some cases are least able to afford it."
Here's what's happened:
Employers can provide group term life insurance to their workers, and many do. Insurers have gotten very good at the actuarial calculations on large groups and find them a very good risk. Thus, such policies are typically relatively inexpensive. For older workers, especially, group term coverage is likely to be about the cheapest available, and in many cases it is available without a medical checkup.
Some employers leave it to workers to pay the premium--and those workers will see no change in their taxes. But many employers pick up at least part of the tab, and some pick up all of it.
If a worker's death benefit is $50,000 or less, whatever amount the employer contributes toward the premium is tax-free to the worker. But if the benefit exceeds $50,000, any part of the premium for the extra coverage that is paid by the employer is treated as taxable income to the employee.
Thus, if your employer provides you with $80,000 of coverage, for example, and pays the entire premium, the part of the premium that goes to pay for the amount over $50,000--in this case $30,000--is taxable to you.
But the premiums involved are not the amounts actually paid by the employer. Instead, the IRS requires that employers use standard tables that place a value on group term coverage related to age. For example, $1,000 worth of coverage for a worker at age 52 was deemed to cost 48 cents a month--no matter what the employer paid for the coverage.
Actuaries and other critics have long argued that the IRS tables were out of line with reality--and have been getting more so as life expectancies have grown and insurance prices have dropped.
Now the IRS has agreed. Under regulations that took effect July 1, new tables are now in place showing lower amounts of taxable income assigned--or "imputed," as tax experts like to say--to workers for the same amount of coverage.
Under the new tables, the $1,000 worth of coverage for a 52-year-old now is valued at 23 cents.
The new table also adds an age bracket at the younger end, resulting in a further reduction for younger workers, though the amounts involved are so small that the savings resulting from the extra bracket are likely to be in pennies.
The overall effect, though, is to reduce the taxable income--and thus taxes--of most workers whose employers pay part or all of the premiums for coverage greater than $50,000.
The effect, though small, will be widespread. Labor Department figures show that 87 percent of the workers in medium-size and large companies have life insurance as a fringe benefit.
In the tangled world of benefits and taxes, however, there are always exceptions. In a few cases, workers who were not subject to the tax before will be subject to it now because the lower IRS premium rates will make it appear that their coverage is subsidized by their employers.
Employers complained that implementing the new rules at midyear was an undue burden on their payroll systems, so the IRS has given companies until the end of the year to implement all the changes. The imputed income was not subject to income tax withholding, but it was subject to Social Security and Medicare withholding.
Patterson said she thinks most companies will take advantage of that, so many workers will not see the benefit in their paychecks until next year, though the reduction in their taxable income will show up on their W-2 forms for 1999.
She said she and other benefits experts are happy to see the move to more realistic tables. The IRS hadn't been debating the point; it was simply a low-priority item.
"The actuaries had been after them saying these just aren't realistic," she said.
CAPTION: LESS TAXING (This graphic was not available)