How Is GTL Calculated in My Paycheck?

Group Term Life (GTL) insurance is a common employer-provided benefit, offering financial protection. While often seen as a straightforward perk, GTL can introduce “imputed income” to your paycheck. This article explains GTL, how its value is calculated, and how it affects your earnings statement and tax documents.

What is Group Term Life Insurance

Group Term Life insurance is a type of life insurance coverage employers provide to a group of employees under a single policy. This benefit is typically part of an employee’s compensation package, offering financial support to beneficiaries if the employee dies while employed.

This insurance provides coverage for a specific period, often tied to employment duration. Employers frequently cover the full premium cost for a baseline amount of coverage. Employees may purchase additional coverage beyond this baseline, often at more favorable group rates than they could obtain individually.

Understanding Imputed Income

When an employer provides non-cash benefits, such as certain types of life insurance, the Internal Revenue Service (IRS) may consider a portion of that benefit as “imputed income.” Imputed income represents the monetary value of a non-cash benefit an employee receives from their employer. The IRS treats this value as if it were actual wages paid to the employee.

For Group Term Life insurance, the IRS mandates that the cost of coverage exceeding $50,000 provided by an employer is a taxable benefit. This rule is outlined in Internal Revenue Code Section 79. This non-cash benefit must be added to the employee’s gross wages for tax calculation purposes.

How Imputed Income is Calculated

The IRS calculates imputed income for Group Term Life insurance using the Uniform Premium Table. This table provides uniform premium rates per $1,000 of coverage based on the employee’s age bracket. The actual premium paid by the employer does not factor into this calculation; standardized IRS rates are used.

To determine taxable imputed income, identify your total employer-provided GTL coverage. Subtract the $50,000 tax-free exclusion. The remaining coverage is then divided by 1,000 and multiplied by the applicable monthly rate from the IRS Uniform Premium Table for the employee’s age bracket.

For example, consider an employee who is 42 years old and receives $100,000 in employer-provided GTL coverage. The first step is to subtract the $50,000 tax-free amount from the total coverage, leaving $50,000 ($100,000 – $50,000). According to the IRS Uniform Premium Table, the monthly cost per $1,000 of coverage for individuals aged 40-44 is $0.10. Therefore, the calculation is ($50,000 / $1,000) $0.10, which equals $5.00 per month. This $5.00 is the imputed income for that month, and it is considered taxable wages.

Impact on Your Paycheck and W-2

The calculated imputed income, while not paid to you in cash, directly affects your paycheck by increasing your taxable gross wages. This increase means that more of your earnings become subject to various payroll taxes. As a result, your employer will withhold higher amounts for federal income tax, Social Security (FICA), and Medicare taxes. Depending on your state’s tax laws, state income tax withholding may also increase.

Because the imputed income is a non-cash benefit, you will not see an additional deposit in your bank account from this amount. Instead, your net take-home pay will be slightly reduced due to the increased tax withholdings. This reduction reflects your tax liability on the value of the employer-provided life insurance coverage exceeding the tax-free limit.

At the end of the year, your employer reports this imputed income on your Form W-2, Wage and Tax Statement. The amount is typically included in Box 1 (Wages, Tips, Other Compensation), Box 3 (Social Security Wages), and Box 5 (Medicare Wages). Additionally, a specific code, “C,” will appear in Box 12 of your W-2, followed by the total annual amount of taxable group-term life insurance.