What Is GTL in Payroll? Group Term Life Insurance Explained
Explore Group Term Life (GTL) insurance in payroll. Learn how this common employee benefit is taxed and reported.
Group Term Life (GTL) insurance often appears on employee pay stubs. This employer-provided benefit is a common component of compensation packages, designed to offer financial protection to employees’ beneficiaries. Understanding how GTL affects your payroll involves specific tax regulations, as it can result in a taxable amount known as imputed income.
What Group Term Life Insurance Means
Group Term Life insurance is a type of life insurance coverage employers provide as a benefit. This employer-sponsored insurance means the employer often pays some or all premiums. Coverage is provided to a group of employees under a single master policy, distinct from individual policies. Employees are usually enrolled automatically, often without a medical exam, for a specified amount of coverage.
GTL coverage usually terminates when an individual’s employment ends. This is called “term” life because it provides coverage for a specific period, generally while employed. Employers often provide this benefit at no direct cost to the employee, enhancing their overall compensation.
A key aspect of employer-provided GTL insurance is its tax treatment. Internal Revenue Code Section 79 provides an exclusion for the first $50,000 of coverage. If an employer provides $50,000 or less in GTL coverage, there are generally no tax consequences for the employee. This tax-exempt threshold makes GTL an attractive and valuable benefit for employees.
Taxable Imputed Income Calculation
While the first $50,000 of employer-provided group term life insurance is tax-free, any coverage exceeding this amount is a taxable benefit to the employee, referred to as “imputed income.” The IRS mandates this imputed income be included in the employee’s gross income for tax purposes, even though the employee does not receive this amount in cash.
The calculation of this imputed income is based on specific IRS guidance, primarily Section 79, and utilizes the IRS Uniform Premium Table (Table I). This table provides a standardized cost per $1,000 of coverage, which varies depending on the employee’s age. Its purpose is to provide a uniform method for employers to value the taxable portion of the benefit.
To calculate the taxable imputed income, first determine the amount of GTL coverage that exceeds the $50,000 tax-exempt threshold. For example, if an employee has $75,000 in coverage, the excess is $25,000. Next, locate the appropriate premium rate from the IRS Uniform Premium Table based on the employee’s age at the end of the tax year. The table categorizes ages into five-year brackets, each with a corresponding cost per $1,000 of coverage for one month.
After identifying the applicable rate, multiply the excess coverage (expressed in thousands) by this table rate. For instance, if the excess coverage is $25,000 (25 units of $1,000) and the Table I rate is $0.10 per $1,000, the monthly imputed cost is $2.50. This monthly cost is then adjusted for the number of months the coverage was in effect. If active for all twelve months, the annual imputed income is $30.00 ($2.50 x 12 months).
Any employee contributions towards GTL premiums using after-tax dollars can reduce the amount of taxable imputed income. This contribution is subtracted from the calculated imputed cost before it is added to the employee’s taxable wages.
Payroll and Tax Form Reporting
The taxable imputed income from group term life insurance, once calculated, has direct implications for an employee’s payroll and tax reporting. This non-cash benefit is added to the employee’s gross wages for tax purposes, even though the employee does not physically receive this amount in their paycheck.
The imputed income from GTL is subject to specific federal taxes, including Social Security and Medicare (FICA) taxes. In most cases, this amount is also subject to federal income tax withholding. This increases the employee’s overall taxable wages, which can affect their tax liability and the amount of taxes withheld from their regular pay.
On an employee’s Form W-2, the taxable cost of group term life insurance coverage exceeding $50,000 is reported in two locations. This amount is included in Box 1, “Wages, tips, other compensation.” For informational purposes, the amount is also reported separately in Box 12 with Code C. This specific code allows both the employee and the IRS to identify the portion of income attributable to the excess GTL coverage.