Group term life (GTL) insurance is an essential part of comprehensive benefits packages today because it gives employees a cost-effective way to obtain coverage without needing a medical examination. In many cases, basic GTL insurance has no bearing on payroll because it’s not considered taxable income. However, coverage that exceeds a certain amount may be subject to taxes and, thus, would necessitate payroll deductions.
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What is group term life insurance?
GTL is the type of life insurance most employers offer as part of a benefits package. It provides financial protection during a specific time frame, such as when employees have dependents or significant debt. If an employee passes away during the term, death benefits are paid to the beneficiaries.
How does GTL insurance work?
GTL insurance can be paid for by employers or employees. Typically, employers will sponsor a base level of coverage at no cost to employees and give them the option to purchase more. Employers might also offer separate voluntary life insurance plans to cover spouses and dependents since GTL insurance extends only to employees.
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When is GTL insurance taxable?
Internal Revenue Code (IRC) Section 79 allows employees to exclude the cost of up to $50,000 of employer-provided group-term life insurance coverage from their taxable income. Coverage in excess of this amount is considered imputed income and subject to Federal Insurance Contribution Act (FICA) taxes. Employers have the option to withhold federal income tax, as well.
Additionally, GTL insurance provided to employees’ spouses and dependents under a separate, employer-funded plan is excluded from taxable income as long as the coverage does not exceed $2,000. The IRS considers it a fringe or de minimis benefit.
How are taxes for GTL insurance determined?
GTL insurance is taxed based on the cost of coverage. However, the term “cost” does not refer to the insurance premiums paid, but rather to the figures provided by the IRS in their uniform premium table.
Uniform premium table
| Employee Age | Cost of $1,000 of GTL per Month |
|---|---|
| Under 25 | $0.05 |
| 25-29 | $0.06 |
| 30-34 | $0.08 |
| 35-39 | $0.09 |
| 40-44 | $0.10 |
| 45-49 | $0.15 |
| 50-54 | $0.23 |
| 55-59 | $0.43 |
| 60-64 | $0.66 |
| 65-69 | $1.27 |
| 70 and above | $2.06 |
How to calculate GTL insurance as imputed income
The formula for calculating the amount of GTL insurance that should be added to an employee’s taxable wages is as follows:
GTL imputed Income = Monthly Rate x (Total Coverage/$1,000)
Example payroll GTL calculation
A 32-year-old employee is covered by a benefit plan that includes $60,000 of employer-provided group-term life insurance. Using the uniform premium table, how much imputed income is subject to taxes each month?
| Benefit | Cost per $1,000 |
|---|---|
| $1 - $50,000 | $0 |
| $51,000 - $60,000 | $0.08 |
Imputed income = $0.08 x ($10,000/$1,000) = $0.80
Note: If an employee uses post-tax dollars to pay for any portion of the coverage in excess of $50,000, that amount is deducted from the imputed income total.
How to report group-term life insurance tax
The amount of GTL insurance treated as imputed income is reported on each employee’s annual Form W-2, Wage and Tax Statement. Employers should list the figure in Boxes 1, 3 and 5, as well as in Box 12 with Code “C.”
Benefits of group term life insurance
GTL insurance is spread over many people, which means premiums are generally affordable for employers. The cost of coverage is also tax deductible as long as the employer is not a beneficiary of the policy.
GTL insurance is beneficial for employees, too. They gain access to coverage that is either fully paid by their employer or at least cheaper than a policy purchased in the individual coverage market. Additionally, medical exams are generally not required with GTL insurance. Individual plans, in contrast, often base premiums on the results of health assessments and may deny coverage to employees with pre-existing conditions.
Additional considerations when offering group term life insurance
Many employees do not fully appreciate the value of life insurance. Helping them understand what coverage means for them and their dependents may help improve plan enrollment and loyalty to the company.
In addition to explaining the benefits of GTL insurance, employee communications should fully articulate plan rules. For instance, some plans might require medical underwriting if an employee elects coverage above a certain amount or enrolls after the initial eligibility period. It’s also a good idea to remind people to regularly update their beneficiary information as needed.
Frequently asked questions about GTL payroll
What is GTL on a paycheck?
If employees see GTL on pay stubs, it means they are enrolled in an employer-sponsored, group term life insurance plan that exceeds $50,000 worth of coverage. The IRS treats the portion of the cost of coverage in excess as taxable income, hence the line item on the pay stub.
Is GTL a deduction or an earning?
GTL insurance may be considered an earning, or imputed income, if the plan’s coverage is greater than $50,000. Payroll deductions for Medicare tax and Social Security tax are required on the amount exceeding this mark.
Can I opt out of GTL?
Group term life insurance is a voluntary employer benefit. As such, eligible employees may decline coverage, or if already enrolled, they may opt out during the next open enrollment period.
Next steps for your group term life insurance
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This article is intended to be used as a starting point in analyzing the GTL meaning in payroll and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
