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Group Term Life (GTL) Deductions Seen on Employee Paycheck -Taxable or Tax Free?
July 26, 2021
Each time your employee receives their paycheck, they see a whole lot of money deducted from their gross pay. Their pay stubs show the deductions from things like taxes, health insurance and perhaps more. Group term life insurance (GTL) is one of those items they may discover on their paystub if it is part of your employee benefits package. This employee benefit may be extended to employees’ spouse and dependents. Even though you, as the employer, may pay the insurance premiums on GTL or pass it along to the employee, the employee may owe the taxes on it depending on the amount of coverage that is given. GTL may be taxable or tax-free, but either way is an inexpensive way for your employee to be offered coverage they need.
What is Group Term Life Insurance?
GTL is a life insurance policy that covers a “group” of individuals. Whoever has this insurance has the option to choose one or more beneficiaries. As the employer, you may offer the coverage to be based on the employee’s annual salary. For example, it may be based on one or two times what the employee makes per year. You can also offer that the employee buys more coverage on their own.
The employee is offered this benefit only as long as they are employed by you or up to a specific amount of time that is set by the policy (usually an age limit). If the employee does leave, they can have the ability to moving or “porting” the policy to an individual term life policy.
When GTL is Taxable?
Group term life insurance will be taxable to the employee when the coverage is more than $50,000. If the amount is over that threshold, it is considered a non-cash fringe benefit and taxable income for the employee. If this amount is less, it will be tax-free to the employee.
If the coverage is also offered to the employee’s spouse and/or dependents, and the coverage is $2,000 or less, then it’s not taxable to the employee. However, if the coverage in this situation is over $2,000, it could be taxable income for the employee. When coverage exceeds $2,000, the total amount of the premium is taxable. When an employee spots GTL on their paystub, it means that it is a taxable benefit to the employee, and the W-2’s they receive at year end represents the total cost of all group insurance the employee got that was more than $50,000 and will be taxable. They will see the amount in box 12c of their W-2 and displayed as income in boxes 1, 3, and 5.
When Should GTL be Reported Through Payroll?
Many employers wait until the end of the year to report taxable non-cash fringe benefits, including GTL. That is fine, but if an employee received this benefit at some point in the year and are terminated at the time the GTL is recorded, then the employer ends up paying for the employee portion of mandatory taxes of Social Security and Medicare on those reported amounts, because there is no paycheck to deduct the taxes from. SimcoHR can assist our clients with setting up their payroll so that the fringe benefit is reported on a per payroll basis and taxed accordingly so that the situation of paying taxes on a terminated employee’s benefit does not happen.
How Taxable Premiums for GTL are Determined
The IRS has a table that employers can utilize to determine the cost of excess coverage. This is based on the employee’s age. The table can be found in the IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits” as seen here.
What to Consider when Offering Group Term Life
Employee benefits keep you, as an employer, competitive to attract and retain the best employees. There are certainly some great reasons to offer Group Life Insurance.
This benefit is great to consider because it can be easier to get if the employee is older, or not in good health, this benefit is guaranteed. It is less money than purchasing a life insurance policy as an employee when the employer pays part of the cost, while giving them some financial security if there they have no other life insurance. However, even though $50,000 is considered taxable income, it may not be enough coverage if the employee has a family or dependents.
Source: https://www.investopedia.com/gtl-group-term-life-on-paycheck-5095033
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Overview of the New Ruling New York employers are once again required to provide a notice in their employee handbooks about reproductive health rights following a recent ruling from the U.S. Court of Appeals for the Second Circuit. The ruling vacated a previous permanent injunction that had blocked the enforcement of the law, meaning employers must now comply with the New York Reproductive Health Bias Law (Labor Law § 203-e). Reproductive Health Bias Law Requirements The Reproductive Health Bias Law was enacted in November 2019 to ensure employees and their dependents can make reproductive health decisions without facing discrimination in the workplace. The law prohibits employers from taking retaliatory actions against employees regarding their reproductive health decisions and requires employers to keep employees' reproductive health information confidential unless there is prior written consent. Under the law, employers must include a notice in their employee handbooks informing employees of their rights and remedies under the Act. This is an essential update that must be made to comply with the law. Impact of the Second Circuit Ruling Religious organizations had challenged the law, arguing that the notice requirement violated their First Amendment rights. However, the Second Circuit disagreed, ruling that the notice requirement was lawful and similar to other workplace disclosure laws. The court noted that while the policy motivating the law may be controversial, the law itself and the obligation for employers to comply are not in question. Action Required for Employers Even though there is no specific penalty for failing to comply with the notice requirement, employers are encouraged to review and update their employee handbooks in light of the court's ruling to ensure they are compliant with the law. For Simco Clients: For clients who utilize Simco’s employee handbook services, rest assured this requirement is already included, and no additional steps are needed.
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