What Is Group Term Life on Paycheck?

Group term life insurance often appears as a benefit provided by employers, designed to offer financial protection to an employee’s beneficiaries upon their passing. When you see an entry related to group term life insurance “on paycheck,” it refers to a specific aspect of its tax treatment rather than a direct deduction for the insurance premium itself. This benefit is a common offering from many companies, providing a layer of security. This article will explain the fundamentals of this insurance, its tax implications, and how these details are reflected in your financial documentation.

Fundamentals of Group Term Life Insurance

Group term life insurance is typically an employer-sponsored benefit, providing a death benefit to your designated beneficiaries if you pass away while covered. A significant characteristic of this type of insurance is that employers often provide a base amount of coverage at no direct cost to the employee. The “term” aspect means the coverage is generally active only for the period you are employed by the company offering the benefit.

This insurance provides coverage for a specific duration, usually on an annual basis, and it is renewed as long as you remain employed. Unlike individual policies, group policies pool many individuals together, which can lead to more favorable rates. While employers may offer additional coverage beyond the basic amount for purchase, the initial employer-provided portion is often a standard benefit.

Taxable Imputed Income from Group Term Life

The Internal Revenue Service (IRS) provides specific rules regarding the tax treatment of employer-provided group term life insurance. According to IRS regulations, the cost of the first $50,000 of group term life insurance coverage provided by an employer is generally considered a tax-free benefit to the employee. This means that for coverage up to this threshold, there is no taxable income attributed to the employee. However, when the employer-provided coverage exceeds $50,000, the cost of the coverage above this amount is treated as taxable income to the employee.

This excess cost is known as “imputed income,” which is a non-cash benefit that the IRS considers part of an employee’s gross income for tax purposes. The calculation of this imputed income is not based on the actual premium the employer pays for the insurance. Instead, it is determined using the IRS Uniform Premium Table, also known as Table 2. This table provides monthly costs per $1,000 of coverage based on the employee’s age, and these rates are applied to the portion of coverage exceeding $50,000.

For instance, if an employee has $100,000 in employer-provided group term life insurance, the cost of the $50,000 exceeding the tax-free limit would be imputed as income. The amount of imputed income increases with age, reflecting the higher cost of insurance for older individuals. This imputed income is subject to federal income tax withholding and FICA taxes, which include Social Security and Medicare contributions.

Appearance on Your Paycheck

When group term life insurance results in imputed income, this amount will appear on your pay stub, although it is not a cash deduction from your net pay. Common labels for this entry on a paycheck might include “GTLI,” “Imputed Income,” or “Taxable GTL.” This entry signifies that the value of the excess life insurance coverage has been added to your gross taxable wages for the pay period.

The primary effect of this imputed income on your paycheck is that it increases the total amount of wages subject to income tax withholding and FICA taxes. While your overall gross wages for tax calculation purposes will be higher, the imputed income amount is not actually paid to you in cash, nor is it subtracted from your take-home pay. It solely serves to adjust your taxable income, ensuring that the appropriate amount of taxes is withheld for this non-cash benefit. Therefore, you will see a higher gross taxable amount, which leads to slightly higher tax withholdings, but your net pay will not be directly reduced by the imputed income amount itself.

Annual Tax Documentation

At the end of the calendar year, the total amount of imputed income from group term life insurance is reported on your Form W-2, Wage and Tax Statement. Specifically, the imputed income for group term life insurance will be listed in Box 12 of your W-2.

The IRS requires that this specific type of imputed income be identified with a unique code. For group term life insurance, the amount will be reported with Code “C” in Box 12. This amount is also included in your total taxable wages reported in Box 1 of your W-2, which represents your gross wages subject to federal income tax. The inclusion of this amount in Box 1 ensures that the non-cash benefit is accounted for when determining your overall tax liability for the year.