What Is ER Cost of Life on a Pay Stub?

When reviewing a pay stub, employees might notice an entry labeled “ER Cost of Life.” This abbreviation indicates the “Employer Responsible” cost associated with employer-provided life insurance. This entry does not typically represent a direct deduction from an employee’s take-home pay. Instead, it serves as a reporting mechanism for a non-cash benefit that the employer provides, which the Internal Revenue Service (IRS) considers taxable under certain conditions.

Understanding Employer-Provided Life Insurance

Employer-provided group term life insurance is a common benefit offered by many companies to their employees. This type of insurance typically covers a group of individuals under a single policy, often without requiring individual medical exams for coverage. Employers usually pay the premiums for this coverage, making it an attractive benefit for employees.

The primary advantage for employees is access to life insurance coverage that might be more affordable or easier to obtain than individual policies. For most employees, the basic group term life insurance coverage provided by their employer up to a certain monetary limit is considered a tax-free benefit. The appearance of a “cost” on a pay stub related to this benefit stems from specific tax rules applied when the coverage amount exceeds this threshold.

The “Cost” on Your Pay Stub: Imputed Income

The “cost” you might see on your pay stub for employer-provided life insurance primarily relates to the concept of imputed income. The IRS mandates that the value of employer-provided group term life insurance coverage exceeding $50,000 is considered a taxable non-cash benefit to the employee. This amount is known as “imputed income” because the employee does not physically receive the cash, but benefits from the employer paying for the coverage.

This imputed income is calculated using specific IRS premium tables, which factor in the employee’s age bracket. The calculation determines a monthly cost per $1,000 of coverage above the $50,000 exclusion. This calculated amount is then added to the employee’s gross taxable wages, not as a deduction from their net pay, but for tax reporting purposes.

How Imputed Income Affects Your Taxes

While imputed income from employer-provided life insurance is not a direct deduction from your paycheck, it increases your overall taxable income. This additional taxable income is subject to taxes, including federal income tax, state income tax (where applicable), and FICA taxes, which include Social Security and Medicare taxes. Consequently, even though you do not see a cash payment for this “cost,” your total tax liability may be higher because your taxable gross income has increased.

This imputed income is reported on your annual W-2 form. Specifically, it is included in Box 1 (“Wages, tips, other compensation”), Box 3 (“Social Security wages”), and Box 5 (“Medicare wages”). Additionally, this amount is often separately noted in Box 12 of the W-2 with code “C”.