As year-end payroll approaches, one benefit often overlooked by businesses is group term life (GTL) insurance and the tax implications that come with it. Many employers provide life insurance as part of their benefits package, but what they may not realize is that coverage over $50,000 creates something called imputed income—and it must be included in an employee’s taxable wages before final payroll runs.
Failing to address this can lead to errors on employee W-2 forms and compliance issues with the IRS. Here’s what every employer should know.
What Is GTL Insurance?
GTL insurance is a common employer-sponsored benefit that provides life insurance coverage to employees, usually at no cost or a reduced rate. It offers peace of mind for employees and their families by paying out a death benefit if the employee passes away.
While this coverage is valuable, the IRS only excludes the first $50,000 of coverage from taxation. Any coverage above that threshold is subject to imputed income rules.
What Is Imputed Income?
Imputed income is the taxable value the IRS assigns to the cost of employer-paid life insurance coverage that exceeds $50,000.
Even though employees don’t receive this amount in cash, the IRS considers the “extra” coverage a taxable fringe benefit. This means employers must:
- Calculate the value of excess coverage
- Add it to the employee’s taxable wages
- Report it on the employee’s W-2 form
Example of Imputed Income Calculation
The IRS provides a cost table in Publication 15-A to determine the monthly value of coverage based on the employee’s age.
Example:
- Employee age: 45
- GTL coverage: $100,000
- Excluded coverage: $50,000
- Excess coverage: $50,000
- IRS rate: $0.15 per $1,000 per month
Calculation:
50 × $0.15 × 12 = $90 in taxable income for the year
That $90 must be added to the employee’s wages and reported on their W-2.
Reporting Requirements for Employers
Employers are responsible for making sure imputed income is properly included in payroll and year-end reporting. According to IRS rules, GTL imputed income should appear in:
- Box 1 – Wages, tips, other compensation
- Box 3 – Social Security wages
- Box 5 – Medicare wages
- Box 12 – Code “C” for cost of GTL coverage over $50,000
It’s important to note that while imputed income is subject to Social Security and Medicare taxes, it is not subject to federal income tax withholding.
Why Employers Should Pay Attention
If GTL imputed income isn’t calculated and reported correctly, employers risk:
- IRS compliance issues
- Incorrect W-2 reporting for employees
- Additional tax liabilities for both employer and employee
By addressing GTL imputed income before the last payroll of the year, employers can avoid these headaches and stay compliant.
How Employers Can Simplify the Process
The good news is that handling imputed income doesn’t have to be complicated. Payroll providers and HR teams can calculate these amounts and include them in final payroll runs so they flow seamlessly into W-2 reporting.
Our payroll team is here to help businesses:
- Calculate imputed income for employees with coverage over $50,000
- Apply IRS tables correctly based on employee age
- Ensure amounts are included in year-end payroll
- Report the income properly on W-2 forms
Final Takeaway
GTL insurance is a valuable employee benefit, but it comes with a tax responsibility many employers overlook. By calculating and reporting imputed income before year-end, businesses stay compliant, avoid errors, and ensure employees aren’t caught off guard at tax time.
If your company provides GTL insurance coverage over $50,000, now is the time to review your payroll and confirm imputed income is being handled correctly. Contact our payroll team for assistance.