Group term policy payout taxable?

Question

One of the other counselors at the TaxAide site I volunteer at saw this. (It was a different day than I volunteer so I haven't seen the W-2 in question):

[Taxpayer] also got a large life insurance payout in 2011, all taxable, on a W2 form (like salary) after her husband's death in 2010. [Taxpayer] has challenged the bank [presumably the decendent's employer], but always gets the answer it's taxable.

So what could make this taxable? Even when the employer pays 100% of the premiums, the imputed value of the coverage is taxable income to the employee, so why would the payout be taxable? Can this happen when it's some kind of non-group or otherwise special policy?

Rich Carreiro · Accepted Answer

Followup...The volunteer gave me additional info:    Regarding the life insurance, the payer is "[Payer's Name] Suppl    Pen[sion] PL[an] Non Qua[lified]" located [City, State]. This was    not [taxpayer's spouse's] employer, taxpayer says. I used the word    "bank" too loosely.  The payout is in boxes 1 and 16 (MA), and    federal and state taxes are withheld. Boxes 3 and 5 are empty.    Box 11 says "nonqualified plans"So I guess it is what it is.  Never had one of theseat our site before.

Alan · Answer

Probably from a nongovernment Sec. 457(b) plan. There's a general rule (there are exceptions), that payments relating to compensation of a decedent that are paid in the year after death go in Box 3 (Other Income) of a 1099-MISC. So, the fact that this payment was reported on a W-2 in the year after death, would be a clue that it had nothing to do with the decedent's compensation for the year of death.

Arthur Kamlet · Answer

This is a nonqualified pension payment, which does not qualify for 1099R treatment, but in most other respects acts line a

1099R. That means not qualified for EIC and not qualified for IRA contributiion. (In Ohio, not subject to municipal income tax.)

Group term policy payout taxable?

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