Imputed Income

Federal tax law requires you to pay income taxes on the value of your employer provided group life insurance in excess of $50,000 and on spouse life insurance when applicable. This is called imputed income. You may choose to avoid imputed income by limiting your basic life insurance benefit to $50,000 and not electing any spouse life insurance. You can limit your basic life insurance benefit during enrollment when you make your other benefit choices.

The example below shows how imputed income is calculated.

Assume the following:

Age: 47

Annual base pay: $77,000

Total basic coverage: $77,000

Total optional employee life coverage: $154,000

Total basic and optional coverage: $231,000 ($77,000 + $154,000)

Employee contribution per $1,000 of optional coverage: $0.15 per month (from the Northrop Grumman Optional Life Insurance Rates column in the table below); please note that the rates shown below are being used to demonstrate the calculation, and are not necessarily the rates that are currently in place

IRS value for each $1,000 of coverage: $0.15 per month (from the IRS Rates for Calculating Imputed Income column in the table below)

The amount of life insurance coverage subject to taxation: $181,000 ($231,000 - $50,000).

Age / Northrop Grumman Optional Life Insurance Rates (Cost per Month per $1,000 of Coverage) / IRS Rates for Calculating Imputed Income (Value per Month per $1,000 of Coverage
Under 25 / $0.05 / $0.050
25 – 29 / $0.06 / $0.060
30 – 34 / $0.08 / $0.080
35 – 39 / $0.09 / $0.090
40 – 44 / $0.10 / $0.100
45 – 49 / $0.15 / $0.150
50 – 54 / $0.23 / $0.230
55 – 59 / $0.44 / $0.430
60 – 64 / $0.66 / $0.660
65 – 69 / $1.30 / $1.270
70+ / $2.10 / $2.060

* Your contribution for optional life insurance for the duration of the benefit plan year is based on your age as of December 31 of the year the benefit plan year begins. (For example, if you turn 47 in October of 2009, your contribution for the July 1, 2009 – June 30, 2010 benefit plan year is based on the age 45-49 contribution rate of $0.15). For purposes of determining applicable imputed income, if any, in a calendar

year, the IRS considers your age as of December 31 of the current calendar year, therefore, your imputed income for all of 2008 will be calculated using the age 45-49 IRS rate of $0.15.

Follow these steps to determine the imputed income:

1. Take the total amount of life insurance subject to taxation $231,000 - $50,000 = $181,000 and divide by $1,000: 181.

2. Calculate the monthly IRS value for the amount of coverage subject to taxation: $0.15 X $181 = $27.15. Multiply this amount by 12 to determine the annual IRS value: $27.15 X 12 = $325.80.

3. Calculate your annual contribution for your optional coverage ($154,000): $0.15 X 154 X12) = $277.20.

4. Subtract your annual contribution for optional coverage (step 3) from the annual IRS value (step 2): $325.80 - $277.20 = $48.60. In this example, $48.60 is the additional taxable income you would have — not the tax itself.

If your age increases to the next pay band in any benefit plan year, your imputed income amount will increase, but the amount you contribute stays the same. For example, if you turn age 50 in October of 2009, your imputed income for 2009 will be calculated using the age 50-54 IRS rate. However, your contributions for the benefit plan year of July 1, 2008 through June 30, 2009 will be calculated based on your age 45-49 contribution rate and your contribution for the benefit plan year of July 1, 2009 through June 30, 2010 will be calculated based on your age 50-54 contribution rate.

Using the assumptions in the example above except the individual is age 50 in October 2009.

Follow these steps to determine the imputed income for calendar year 2010:

1. Take the total amount of life insurance subject to taxation $231,000 - $50,000 = $181,000 and divide by $1,000: 181.

2. Calculate the monthly IRS value for the amount of coverage subject to taxation: $0.23 X $181 = $41.63 Multiply this amount by 12 to determine the annual IRS value: $41.61 X 12 = $499.56:

3. Calculate your annual contribution for your optional coverage ($154,000): (a) $0.15 X 154 X 6 = $138.60 (January through June), and (b) $0.23 X 154 X 6 = $212.52 (July through December). Total IRS value: $138.60 + $212.52 = $351.12

4. Subtract your annual contribution for optional coverage (step 3) from the annual IRS value (step 2): $499.56 - $351.12 = $148.44 In this example, $148.44 is the additional taxable income you would have — not the tax itself.