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

PS 58 costs are the taxable value the IRS assigns to life insurance protection that an employer or a qualified retirement plan pays for on your behalf. When someone else’s dollars fund a policy that pays your beneficiary, the coverage itself is treated as income to you each year, even though no cash changes hands. The amount is calculated using Table 2001, published by the IRS in Notice 2002-8, and the industry still calls the figure a “PS 58 cost” after the original 1955 rate table.¹ Two things ride on getting the number right: the income tax you owe this year, and the tax basis that protects you from being taxed twice when the policy eventually pays out.

When the Rule Applies

Two arrangements produce PS 58 costs. The first is a split-dollar life insurance arrangement taxed under the economic benefit regime, where the employer owns a permanent policy but the employee’s beneficiary receives a share of the death benefit. The employee is treated as receiving an annual economic benefit equal to the cost of that protection, valued using Table 2001.² If the arrangement is an equity split-dollar plan, the employee also has to report the value of any other economic benefits the policy provides, such as access to cash value.

The second is life insurance held inside a qualified retirement plan. When a 401(k), profit-sharing plan, or defined benefit plan uses plan assets to buy insurance on a participant, IRC §72(m)(3) requires the participant to include the cost of the current life insurance protection in gross income for the year.³ Without this rule, pre-tax plan dollars could fund large death benefits with no income tax ever paid.

One boundary is worth stating up front: standard group-term life insurance is not a PS 58 situation. Section 79 excludes the first $50,000 of employer-provided group-term coverage from income, and any excess is valued using a separate table (Table I under Reg. 1.79-3), not Table 2001.⁴ The IRS specifically carves §79 group-term plans out of the split-dollar definition.⁵ If that’s the only employer coverage you have, PS 58 does not apply to you.

Economic Benefit vs. Loan Regime

Only one of the two split-dollar regimes uses Table 2001. Which regime applies turns on who owns the policy.

Under the economic benefit regime, the employer owns the policy. The employee is treated as receiving an annual non-cash benefit equal to the value of the life insurance protection, and that value comes from Table 2001. This is the regime that produces PS 58 costs.⁶

Under the loan regime, the employee (or a trust) owns the policy and the employer’s premium payments are treated as loans. The taxable amount is not a Table 2001 figure but forgone interest, measured against the applicable federal rate under the below-market loan rules.⁶ Misidentifying the regime changes the whole calculation, so confirm ownership before running any numbers.

How to Calculate the Annual Amount

The calculation is a three-step process, and it has to be redone every year because both inputs move: the cash value grows and the insured ages.

Step 1. Find the net amount at risk (NAR). This is the pure insurance component of the policy: the death benefit minus the cash surrender value (or the portion of the death benefit payable back to the employer or plan). If the death benefit is $1,000,000 and the cash surrender value is $500,000, the NAR is $500,000.

Step 2. Look up the Table 2001 rate for the insured’s attained age. Table 2001 gives a rate per $1,000 of coverage. At age 45, for example, the rate is $1.53 per $1,000.¹ These rates have not been adjusted since they were first published and remain fixed.

Step 3. Multiply. Divide the NAR by 1,000 and multiply by the rate. Using the numbers above: $500,000 ÷ 1,000 = 500 units × $1.53 = $765. That $765 is the imputed income the employee reports for the year.¹

Table 2001 rates climb sharply with age. A 55-year-old pays roughly three times the rate of a 45-year-old, and a 65-year-old more than ten times. A growing cash surrender value cuts the NAR in the other direction, so the annual number can drift up, down, or sideways depending on how the policy performs.

Using the Insurer’s Term Rates Instead

Table 2001 is the default, but the IRS allows employers to substitute the insurer’s published one-year renewable term rates when doing so produces a lower figure. The rates have to be the ones the insurer actually charges standard-risk applicants for initial-issue one-year term coverage. Rates invented for executive benefit programs do not qualify.¹ The burden of proof sits with the employer and employee, so keep the insurer’s rate documentation on file. If the alternative rates fail the initial-issue test, the calculation falls back to Table 2001.

Survivorship (Second-to-Die) Policies

Policies that pay only after both insureds have died use a modified calculation. Look up each insured’s Table 2001 rate separately by age, compute the cost for each life against the NAR, and add the two together.⁷ The combined figure often runs higher than plan sponsors expect the first time they see it.

How It Gets Reported

The reporting form depends on the arrangement.

For split-dollar arrangements and non-qualified plans, the employer reports the economic benefit on Form W-2, adding it to Box 1 wages.⁸ The imputed amount is not a separate payment; it inflates the total taxable wages the employee owes income tax on.

For life insurance held inside a qualified plan, the plan trustee or administrator issues Form 1099-R. The cost appears in Box 1 (Gross Distribution) and Box 2a (Taxable Amount), with Code 9 in Box 7 to identify it as a cost of current life insurance protection rather than an actual cash distribution.⁹ The amount is not subject to the 10% early distribution penalty under §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, not just income tax. Treasury’s split-dollar regulations expressly reach FICA and FUTA, and the benefit is treated as provided on the last day of the employee’s taxable year for timing purposes.² Combined employer and employee FICA can add roughly 15% to the effective cost below the Social Security wage base, plus the 2.9% Medicare tax on amounts above it.

The Basis You Build and Recover

Every dollar of PS 58 cost you report as income creates an equal dollar of tax basis in the policy, sometimes called the investment in the contract. Over years of participation this basis can become substantial, and it does real work when the policy pays out.

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

If the employee surrenders the policy for cash during life, the taxable gain equals the cash surrender value received minus the total investment in the contract, which includes any after-tax premiums the employee paid directly and the cumulative PS 58 costs previously reported as income. Forgetting the PS 58 basis on surrender is a common and expensive error. It means paying tax on money you already paid tax on.

Business Owner Wrinkles

More Than 2% S-Corporation Shareholders

Shareholders who own more than 2% of an S-corporation follow different insurance rules than regular employees. Premiums paid on their behalf must be included in W-2 Box 1 wages, though those amounts are not subject to FICA or FUTA when paid under a plan covering a class of employees.¹¹ When the S-corporation funds a split-dollar arrangement for one of these shareholders, the imputed economic benefit follows the same modified reporting path, and the shareholder loses access to certain employee-only exclusions.

Self-Employed Participants

A self-employed individual whose own qualified plan buys life insurance on them gets no deduction for the portion of the contribution used to buy the insurance. It is treated as a non-deductible personal expense and does not count toward the maximum allowable contribution.¹² The PS 58 cost still has to be reported as income; there just isn’t an offsetting deduction the way a regular employee’s employer would take one.

Penalties for Missing or Wrong Reporting

Employers who omit PS 58 costs from W-2s and plan administrators who leave them off 1099-Rs face information return penalties under IRC §§6721 and 6722. For returns due in 2026, the tiers for large businesses (gross receipts over $5 million) are:

Corrected within 30 days: reduced per-return penalty, annual cap of $683,000.
Corrected 31 days late through August 1: $130 per return, up to $2,049,000.
Corrected after August 1: $340 per return, up to $4,098,500.
Intentional disregard: $680 per return with no annual cap.

Small businesses (gross receipts of $5 million or less) pay the same per-return amounts against lower annual caps.¹³

The bigger risk sits with the employee. If PS 58 costs are not properly reported as current income on a policy held in 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 §101(a). For a large policy, that reclassification can cost the beneficiary far more than years of properly reported imputed income 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