Scenario: An employee is enrolled in a GTLI Plan which covers the employee only. Usually the amount of excess coverage over $50,000 gives rise to imputed income which needs to be added to taxable income. I have read, but been unable to verify, that when the employee is disabled, the amount of coverage that goes toward the calculation of imputed income is zero for the period of disability.

I have also read that the value of the excess over $50,000 of GTLI coverage is not taxable to a retired or terminated employee. The reference led to another section of the reg. specifically 1.79(b)(2), which discusses the exception to the rule of inclusion. Unfortunately, this discussion does not pertain to the reporting of GTLI by the employer, but rather the requirements an EMPLOYEE must undertake to delete the added income when filing his personal income tax return.

My question is whether disability is an exception to the application of imputed income and whether there is a qualification on the disability, such as it must be total disability. Any reference source would be appreciated. Thanks.

Where have you read that the value of GTL in excess of $50,000 is not taxable to a retired or terminated employee?

See IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. There is no exception for retired employees.

This was actually stated on a message sent out by SAP to all client users. We have attempted to get them to cite chapter and verse for their assertion that when the employee is disabled, the amount of coverage that goes toward the calculation of imputed income is zero for the period of disability.

No luck so far. However I did review publication 15-B and agree there is no exception for retired employees.

Don't listen to SAPs. So long as the GTLI remains in force the excess is taxable and reportable on form W-2. The real interesting question (to me) is: what if an employee is on long-term disability for the entire calendar year. Does the employer have to cut a W-2 simply for the purpose of reporting the imputed income?

Is it possible that there is no imputed income for the disabled EE because the GTLI policy has a waiver of premium provision?