Group Term Life Imputation, a Lost Disability Claim, and COBRA
Lee, 47, has worked four years for a 45-employee company. The employer-paid group term life plan provides $150,000 of coverage. The employer also pays the full premium for a long-term disability plan that replaces 60% of base salary, offsets 100% of Social Security disability benefits, has a 90-day elimination period, and defines disability as own occupation for 24 months, then any occupation. Lee earns $90,000 ($7,500 a month). In June he resigns to take a job at a start-up, and two months later he is injured and cannot work; he is approved for $1,800 a month in Social Security disability benefits. He asks HR about continuing coverage, the size of his disability check, and whether the life insurance creates a tax problem.
1. What is the tax treatment of Lee's $150,000 of group term life coverage?
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The $50,000 exclusion. Employer-provided group term life is income-tax-free up to the first $50,000 of face amount. The excess is measured using the IRS Table I rate for the employee's age, regardless of what the employer actually pays.
Calculation.
- Excess coverage: $150,000 − $50,000 = $100,000
- Table I rate, age 45–49: $0.15 per $1,000 per month
- Monthly imputed income: 100 × $0.15 = $15
- Annual imputed income: $15 × 12 = $180
Reporting. The $180 is included in his W-2 wages and is subject to income tax and FICA withholding. It is not a cash payment and does not affect the death benefit.
Exceptions worth flagging. If the plan is discriminatory in favor of key employees, key employees lose the $50,000 exclusion entirely and are taxed on the full Table I cost of all coverage. Coverage of $50,000 or less creates no imputed income at all. Permanent (whole life) group coverage is taxed differently - the employer's cost is imputed on a different basis.
2. How much disability income will Lee actually receive, and is there a problem with his claim?
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The threshold problem: no coverage. Group LTD covers disabilities that begin while the employee is insured under the plan. Lee resigned in June and was injured two months later; his coverage ended on his termination date, and group LTD generally has no individual conversion right. His claim should be denied - the calculation below shows only what he would have received had the disability begun while he was still employed.
Hypothetical calculation.
- 60% × $7,500 = $4,500 a month
- Social Security offset of 100% of $1,800 = $2,700 a month
- The first payment is not due until after the 90-day elimination period, so his first check arrives in month 4; the elimination period itself is self-funded.
Taxation. Because the employer pays the entire premium, the benefit is taxable as ordinary income when received - but not subject to FICA. Had Lee paid the premium with after-tax dollars, the benefit would have been tax-free, which is a materially different after-tax result.
After 24 months. The definition shifts from own occupation to any occupation. If his injury leaves him able to perform sedentary work at any reasonable occupation, benefits stop - a common source of claim disputes.
3. What are Lee's COBRA rights after resigning, and what deadlines apply?
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Eligibility. A voluntary resignation is a qualifying event, giving Lee and his covered dependents 18 months of continuation coverage. (Had he been terminated for gross misconduct, no COBRA right would arise.)
Timeline.
- Employer notifies the plan administrator within 30 days of the event.
- The administrator notifies Lee within 14 days of receiving that notice.
- Lee has 60 days from the notice (or from the date coverage ends, if later) to elect.
- He has 45 days after electing to pay the first premium.
Cost and retroactivity. The plan may charge up to 102% of the group rate (100% plus a 2% administrative fee). Coverage is retroactive to the date group coverage ended, so a lapse in the election period means he pays back premiums for the gap.
Ending early. COBRA ends earlier if he fails to pay, if the employer terminates the group plan entirely, or when he becomes entitled to Medicare.
Practical comparison. Losing group coverage is a special enrollment period for a marketplace plan, which may be far cheaper than 102% of the group rate and may carry a premium tax credit. He should price both before electing.