What Is GTL on a Pay Stub and Why Is It Taxable?

This employer-provided benefit is a common offering designed to provide financial protection to an employee’s beneficiaries. While GTL is a valuable benefit, its presence on a pay stub is often due to specific tax regulations that classify a portion of its value as taxable income.

Understanding Group Term Life Insurance

Group Term Life insurance is a type of life insurance policy that an employer provides to a group of employees. This benefit is typically offered as part of an overall employee benefits package, aiming to provide a basic level of financial security for an employee’s loved ones in the event of their passing. The “term” aspect signifies that the coverage is for a specific period, usually renewed annually, and does not build cash value over time.

Unlike individual life insurance policies, which are purchased by an individual and often require medical underwriting, GTL policies are issued to the employer, covering multiple employees under a single contract. Employees are usually covered without extensive medical examinations, making it an accessible form of coverage. This employer-sponsored structure allows for more favorable group rates, making it an attractive and widely adopted employee benefit.

The Taxable Component of GTL

While employer-provided Group Term Life insurance is a benefit, a specific portion of its value is considered taxable income by federal tax law. This taxation arises because the Internal Revenue Service (IRS) views the cost of coverage exceeding a certain threshold as an additional form of compensation. The Internal Revenue Code Section 79 establishes that the cost of group term life insurance coverage provided by an employer above $50,000 is subject to taxation.

The taxable amount is defined as “imputed income,” which represents the monetary value of a non-cash benefit. Even though employees do not directly receive this money, the IRS requires that this value be added to their taxable wages. This rule applies to the cost of the insurance coverage itself, not to any death benefit that might eventually be paid out to beneficiaries.

How Imputed Income is Calculated

The calculation of imputed income for Group Term Life insurance follows a specific methodology established by the IRS. It involves using the IRS Premium Table, Table I, which provides a uniform cost per $1,000 of coverage based on the employee’s age.

To determine the taxable amount, the first step is to subtract the $50,000 tax-free exclusion from the total employer-provided coverage. The remaining amount is then divided by 1,000 to find the number of $1,000 units. This number is then multiplied by the monthly cost per $1,000 corresponding to the employee’s age bracket in Table I.

For example, for an employee aged 40-44, the Table I rate is $0.10 per $1,000 of coverage per month. If an employee is 42 years old and has $75,000 in employer-provided GTL coverage, the excess coverage is $25,000 ($75,000 – $50,000). This $25,000 is divided by $1,000, resulting in 25 units. Multiplied by the $0.10 Table I rate, this equals $2.50 per month, or $30 annually, which is the imputed income. Any after-tax contributions made by the employee towards the GTL policy reduce this taxable amount.

GTL’s Effect on Your Pay Stub and Taxes

The imputed income from Group Term Life insurance directly impacts an employee’s pay stub and overall tax obligations. This non-cash benefit is added to an employee’s gross taxable wages, even though it does not increase their net take-home pay. The inclusion of this imputed income increases the total amount subject to federal income tax, Social Security (FICA), and Medicare taxes, leading to higher withholdings from each paycheck.

On a pay stub, this imputed income often appears as a separate line item under earnings or taxable wages, though it might be identified simply as “GTL Imputed Income” or similar. At the end of the year, the total imputed income for GTL is reported on Form W-2. It is included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages). Additionally, this specific amount is separately shown in Box 12 with Code “C.”