PS 58 Costs: How to Calculate, Report, and Track Basis

PS 58 costs are the taxable value of life insurance protection that an employer or a qualified retirement plan provides on your life. Whenever someone else’s dollars pay the premium on a policy that would pay your beneficiary, the IRS treats the cost of that protection as income to you for the year, even though no money changes hands in your direction. The number is calculated annually using Table 2001, published in IRS Notice 2002-8, though practitioners still use the “PS 58” label from the original 1955 rate table.¹ Getting the figure right matters twice: once when it increases your current year’s taxable income, and again years later when it reduces the tax owed on any payout from the policy.

When PS 58 Costs Apply to You

Two situations produce PS 58 costs. The first is a split-dollar life insurance arrangement under the economic benefit regime, where your employer owns a permanent policy but your beneficiary is entitled to part of the death benefit. The regulations treat you as receiving an annual non-cash benefit equal to the cost of that insurance protection, measured with Table 2001.² If the arrangement is an equity split-dollar plan that also gives you access to cash value, you report the cost of the protection plus any other economic benefits provided.

The second is life insurance held inside a qualified plan. When a 401(k), profit-sharing plan, or defined benefit plan uses plan assets to buy a policy on a participant, IRC Section 72(m)(3) requires that participant to include the current cost of the insurance protection in gross income each year.³ Without that rule, pre-tax plan money could fund large tax-free death benefits.

Two situations that look similar but do not produce PS 58 costs are worth flagging. Standard group-term life insurance from an employer falls under Section 79, which excludes the first $50,000 of coverage and values the excess with its own Table I rather than Table 2001.⁴ The split-dollar regulations expressly exclude Section 79 arrangements, so the two frameworks never overlap.⁵ Separately, split-dollar arrangements structured under the loan regime (where the employee or a trust owns the policy and premium payments are treated as loans) use below-market loan rules measuring forgone interest at the applicable federal rate, not Table 2001.⁶ If the employer owns the policy, you are in Table 2001 territory. If you own it and premiums are loans, you are not.

How to Calculate the Annual Amount

The calculation has three steps and has to be run every year, because both the policy’s cash value and the insured’s age change.

First, find the net amount at risk. Subtract the policy’s cash surrender value from the total death benefit. On a $1,000,000 policy with $500,000 of cash surrender value, the net amount at risk is $500,000. That gap is the pure insurance component the employer or plan is providing.

Second, look up the Table 2001 rate for the insured’s attained age on their nearest birthday. The rates are per $1,000 of coverage and have not been adjusted since the table was issued. At age 45, the rate is $1.53 per $1,000.¹

Third, divide the net amount at risk by 1,000 and multiply by the rate. In the example: 500 units at $1.53 equals $765 of imputed income for the year.¹

The rates climb sharply with age. A 55-year-old pays roughly three times the rate of a 45-year-old; a 65-year-old pays more than ten times. A growing cash surrender value cuts the other way by shrinking the net amount at risk. Depending on how those two forces interact, your reported amount can rise, fall, or stay roughly level year to year.

Substituting the Insurer’s Term Rates

Table 2001 is the default, but the IRS allows you to use the carrier’s own one-year renewable term rates if they are lower. The rates must be the ones the insurer actually charges all standard-risk applicants for initial-issue one-year term coverage, not rates manufactured for executive benefit programs.¹ The IRS has challenged artificially low rates that were never offered to the public, and when they fail the test, Table 2001 applies instead. Keep the insurer’s documentation on file, because the burden of proof sits with the employer and employee.

Survivorship Policies

Second-to-die policies, which pay only after both insured individuals have died, use a modified method: look up each insured’s Table 2001 rate separately by age, apply each to the net amount at risk, and add the results.⁷ The combined imputed income usually runs higher than a single-life policy of the same face amount.

Where the Amount Shows Up on Your Tax Forms

Reporting depends on which arrangement produced the cost. For split-dollar and non-qualified plan arrangements, the employer adds the economic benefit to Box 1 (Wages, tips, other compensation) of your Form W-2.⁸ It is not a separate payment; it rides along inside your total taxable wages and raises the income tax you owe on them.

For life insurance held inside a qualified retirement plan, the plan trustee reports the cost on Form 1099-R. The amount appears in Box 1 and Box 2a, and Box 7 carries Code 9 to flag it as a cost-of-current-life-insurance-protection charge rather than an actual cash distribution.⁹ The amount is not hit with the 10% early distribution penalty under Section 72(t), even if the participant is under 59½.

FICA and FUTA

The economic benefit from a split-dollar arrangement is wages for employment tax purposes as well as income tax purposes. The split-dollar regulations apply to FICA and FUTA, and treat the benefit as provided on the last day of the employee’s taxable year for timing.² Combined employer and employee FICA on the imputed amount runs roughly 15% below the Social Security wage base, plus the 2.9% Medicare rate above it.

Why Tracking the Basis Pays Off Later

Each dollar of PS 58 cost you report builds tax basis in the policy, sometimes called your investment in the contract. Years down the line, that accumulated basis offsets taxable income when the policy pays out, so you are not taxed a second time on the same economic value.

If the insured dies while the policy is held in a qualified plan, the proceeds split in two. The pure insurance portion, meaning the amount above the cash surrender value immediately before death, comes to the beneficiary income-tax-free under Section 101(a).¹⁰ The cash surrender value portion is a taxable plan distribution, but the PS 58 costs the participant already reported reduce that taxable amount dollar for dollar.³

If instead the employee surrenders the policy for its cash value during life, the gain equals the cash surrender value minus the employee’s investment in the contract. That investment includes both any after-tax premiums paid directly and the cumulative PS 58 costs previously reported as income. Forgetting the PS 58 basis when computing surrender gain is a common and expensive error.

Special Rules for Owners

Shareholders owning more than 2% of an S-corporation are treated outside the regular employee rules for insurance. Premiums paid on their behalf for accident and health coverage are added to W-2 Box 1 wages, though not subject to FICA or FUTA when paid under a plan covering a class of employees.¹¹ When an S-corporation funds a split-dollar arrangement for a greater-than-2% shareholder, the imputed benefit follows those modified rules and the shareholder loses access to certain employee-only exclusions.

Self-employed individuals using their own qualified plans face a separate limitation. The portion of a plan contribution used to buy life insurance is a non-deductible personal expense; it does not qualify for a deduction under Section 162 or 212, and it does not count toward the maximum allowable contribution.¹² The PS 58 cost still has to be reported as income, with no offsetting deduction for the contribution that paid for it.

What Happens When PS 58 Costs Go Unreported

Information return penalties under IRC Sections 6721 and 6722 apply when an employer omits PS 58 amounts from a W-2 or a plan administrator leaves them off a 1099-R. The per-return amount scales with how late the correction is: a reduced amount within 30 days, $130 through August 1, $340 after that, and $680 for intentional disregard, each with annual caps that depend on the size of the filer.¹³

The larger risk sits with the employee and beneficiary. If PS 58 costs were never properly reported as current income on a policy held inside a qualified plan, the IRS can treat the entire death benefit as a taxable plan distribution rather than letting the insurance portion pass tax-free under Section 101(a). The reclassification often costs the family far more than the annual income tax on the imputed amount ever would have.

1
Internal Revenue Service. Notice 2002-8 – Split-Dollar Life Insurance Arrangements
2
eCFR. 26 CFR 1.61-22 – Taxation of Split-Dollar Life Insurance Arrangements
3
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
4
Internal Revenue Service. Group-Term Life Insurance
5
Federal Register. Split-Dollar Life Insurance Arrangements
6
Internal Revenue Service, Treasury. Split-Dollar Life Insurance Arrangements – Final Regulations
7
Internal Revenue Service. Notice 2001-10 – Split-Dollar Life Insurance Interim Guidance
8
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
9
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
10
Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
11
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
12
eCFR. 26 CFR 1.404(e)-1A – Contributions on Behalf of a Self-Employed Individual
13
Internal Revenue Service. Information Return Penalties