At MVP Plan Administrators, we want to bring pertinent information to our clients that they find useful and not be a waste of their time. Let’s face it, we all have way too much going on today to add anything further to our plates.  We get that.  We also want to be as helpful as possible to everyone we work with.

With that being said, we have developed a series of informational emails and videos of the BIGGEST ERRORS, we see in the administration of retirement plans, that can be costly to the Plan Sponsor.  In our opinion, the #2 error we see most often is . . . . . . . . . . . is including Group Term Life (GTL) properly in the definition of compensation, thereby withholding participant salary deferral elections properly.  If you are interested in knowing why, keep reading!

If your plan document uses either the W2 definition or the §415 safe harbor definition of compensation, then the imputed income from excess GTL coverage is included in compensation. If your plan document defines compensation as §3401(a) wages for withholding, the imputed income from excess GTL coverage is excluded.

How Excess GTL Affects Retirement Plan Contributions

The IRS includes the value of excess GTL coverage in the employee's taxable income, but this inclusion can also affect retirement contributions, depending upon the definition of compensation for the plan as described above. Meaning that participant salary deferrals should be withheld on GTL that is included in compensation.

Strategies to Mitigate the Impact of Excess GTL

Given that excess GTL can affect taxable income and retirement contributions, employees and employers may want to take steps to minimize its impact:

• Consider Reducing GTL Coverage: Employees may wish to reduce their group term life insurance coverage to ensure they stay below the $50,000 threshold, avoiding additional taxable income and the associated retirement contribution consequences.
• Review Retirement Plan Design: Employers can adjust their retirement plan design or modify how employer contributions are calculated to ensure that employees don’t unintentionally face higher taxes or excess retirement contributions due to excess GTL.
• Consult with a Tax Advisor: Given the complexity of tax laws surrounding excess GTL and retirement contributions, it’s always wise to consult with a tax advisor to understand the full implications and potential strategies for managing this issue.

Conclusion

Excess Group Term Life insurance can have significant impacts on both an employee’s tax liability and their retirement plan contributions. While it may increase taxable income, it can also create opportunities for higher retirement plan contributions, especially for those nearing the annual contribution limits. However, it’s important for employees and employers to carefully monitor GTL coverage levels and work with financial and tax advisors to manage the financial implications of excess coverage. By staying informed and making strategic decisions, employees can better navigate the complexities of their benefits package and optimize their retirement savings strategy.

Click the link to watch the related video: Common Errors- Issue #2.

If you have questions or wish to discuss in more detail, please give your Relationship Manager a call or call us directly at (919) 465-2220