Handling Group-Term Life Insurance

Group-term life insurance provided by employers to employees and their dependents is a special type of benefit subject to specific taxation and reporting requirements in both the U.S. and Canada.

For more information about imputed income, see Working with Imputed Income .

Topics

In the United States

In Canada

With PeopleSoft Payroll

Setting Up Deductions for Group-Term Life Plans

Understanding U.S. System Calculations

Understanding Canadian System Calculations

Imputed Income Calculations in Action

Adjusting Imputed Income for U.S. Employees

In the United States

In the U.S., the value of the first $50,000 of group-term life insurance provided by an employer to an employee is not considered taxable income. The value of coverage in excess of $50,000, as computed according to IRS regulations, less any premiums paid by the employee with after-tax dollars, is considered taxable income, and is also subject to social security and Medicare taxes. Although the amount must be reported as taxable income on the employee's Form W-2, the value of excess group-term life insurance coverage is not subject to federal income tax withholding.

An employer may also provide group-term life insurance coverage for an employee's spouse and/or children. Dependent group-term life insurance coverage up to a value of $2,000 does not represent taxable income. However, if the value of the dependent group-term life insurance exceeds $2,000, the value of the entire coverage amount—as computed according to IRS regulations—becomes taxable income; subject to social security and Medicare taxes. Unlike the taxable income attributed to the employee's excess life insurance, it is also subject to federal income tax withholding.

Note. This is not an issue for federal employers, because FEGLI life insurance is paid by employee deductions and is not employer-provided.

In Canada

In Canada, the value of all employer-paid premiums for group-term life insurance on employees and their dependents constitutes a taxable benefit.

With PeopleSoft Payroll

After you set up your tables and enrolled employees in your plans, PeopleSoft Payroll does the rest, calculating their imputed income and associated taxes automatically.

Here are the issues we discuss in this section:

Setting Up Deductions for Group-Term Life Plans

Once you establish that a particular plan is a group-term life plan, here's how to set it up in PeopleSoft Payroll so that imputed income is calculated.

Topics

Selecting Deduction Classifications

CAN Selecting Deduction Classifications

Understanding Tax Options

Selecting Deduction Classifications

In addition to the Taxable Benefit classification, the group-term life plan has at least one other classification: Nontaxable Benefit—After-Tax or Nontaxable Benefit—After-Tax/Before-Tax. You set up these classifications on the Deduction Table - Tax Class Page .

For FEGLI, there are no additional classifications. It is an after-tax employee deduction. Basic Life Options A, B, and C coverage are set up as separate Deduction Codes.

CAN Selecting Deduction Classifications

After Tax and Taxable Benefit are your deduction classification options. The important point is that all group-term life plans must have a Taxable Benefit Deduction Classification for the system to calculate imputed income amounts and consider them income eligible for federal and provincial tax purposes.

For more information about setting up a deduction classification for a group-term life plan and PSTI, see the Deduction Table - Tax Class Page . For more information and examples of life insurance deduction setups, see Understanding Canadian Deductions .

Selecting Sales Tax (Canada)

In Ontario and Quebec, premium contributions are subject to Provincial Sales Tax on Insurance (PSTI). For these provinces, you need to define a Sales Tax Type of PSTI, which is associated with both After-Tax and Taxable Benefit deduction classifications.

The employee's province of residence on the Name/Address page of the Personal Data table determines the provincial rate the system uses when calculating the employee portion of a deduction that is subject to provincial sales tax on insurance (PSTI). The system uses the province in which the employee works to determine and calculate the provincial rate for the employer portion. All other sales tax types use the employee's work location to determine the provincial rate.

Understanding Tax Options

With your deduction properly set up, PeopleSoft Payroll calculates the taxable amount for federal, state, and local taxable income. In most cases, you indicate that imputed income—the Taxable Benefit—Adds To Effect on FICA Gross, and has No Effect on FUT Gross. The cost of group term life insurance in excess of $50,000 is not subject to federal withholding tax. So, if you want the system to withhold FWT, be sure to select the Withhold FWT check box.

For more information about Group Term Life Insurance, Imputed Income, and taxable benefits, see the Deduction Table - Tax Effect Page .

If there are state or local taxes that must be calculated based on a taxable gross that differs from the federal taxable gross, enter GTL (for Group-Term Life) as the Taxable Gross Component ID. This links the deduction to the Taxable Gross Definition Table. The Taxable Gross Definition Table defines the taxability for specific earnings or deduction types (such as imputed income) that must be treated differently at the state or local level than at the federal level. The Taxable Gross Definition Table is where you make any necessary changes to taxable gross definitions.

PeopleSoft maintains the entries on the Taxable Gross Definition Table for group-term life taxable grosses (for U.S. only). The only time you should have to change an entry, therefore, is when state or local taxing authorities alert you to changes in their regulations. PeopleSoft will incorporate the changes in its next tax update. As always, should you discover an error or that information is missing, please notify the Global Support Center, so we can incorporate the change or addition in our next tax update.

You won't ordinarily have to change the Taxable Gross Definition Table. But, if necessary, you can change definitions of taxable gross for state and local income taxes, state disability insurance, and state unemployment taxes.

On the Taxable Gross Definition Table, you can specify for each state whether the withholding follows the federal rules. For more information, see the Taxable Gross Definition Table Page in the Defining Your Payroll Taxes chapter of this PeopleBook.

Selecting GTL or DPL

Depending on whether you're setting up an employee group-term life plan or a dependent life plan, you select the appropriate option in the GTL/DPL field on Deduction Table - Tax Effect page. Imputed income for dependent life is calculated separately from regular (individual) group term life. Your selection here determines which calculation the system uses. Click the down arrow for a list of valid values.

If you're setting up a regular or supplemental employee life plan that qualifies as a group-term plan, select Add to Group Term Life. If you're setting up a dependent life plan that qualifies as a group-term plan, select Add to Dependent Life. The third option, No Imputed Income Calculated, is for other types of plans that do not qualify as group-term life plans.

Understanding U.S. System Calculations

To calculate imputed income for all group-term life plans (except dependent life) in accordance with IRS regulations, the system does the following processes when you run Pay Calculation:

The resulting amount is added to the employee's taxable gross on the paycheck record. You can view this amount using the Paysheets, Paycheck Deductions page. It appears as the Taxable Benefit under the appropriate group-term plan type and deduction code.

In dependent life plans, if the total dependent coverage is $2,000 or less, the coverage amount is not considered taxable. If the total dependent coverage is greater than $2,000, the entire coverage amount is considered taxable, not just the amount in excess of $2,000. Consequently, for dependent life plans in Step 1, the system adds up the total dependent coverage and in Step 2, determines whether the total is greater than $2,000; if it is, the system proceeds with the remaining steps. On the Paycheck Deductions page, the results of dependent life calculations are displayed as a Taxable Benefit separate from the regular (individual) group-term life Taxable Benefit(s).

Understanding Canadian System Calculations

To calculate the taxable benefit for all group-term life plans, when you run Pay Calculation the system performs the following processes:

  1. Determines an employee's total life insurance coverage (all plans that have a taxable benefit component defined), including both employer- and employee-paid coverage. For example, an employee might belong to several group-term life plans, such as basic life, supplemental life, and extra life coverage. In such a case, PeopleSoft Payroll combines the calculated coverage of all the plans to determine the employee's total life insurance coverage. (Any plans that are completely employee-paid should not have a taxable benefit defined.)

  2. Determines the percentage of the total for each plan.

  3. Calculates the taxable benefit based on the actual cost to the employer. For example, if the employer pays $1 for every $1,000 of coverage, and the employee has $50,000 of coverage, the system multiplies $1 by 50 to arrive at $50, which is then forwarded to Step 4.

  4. Subtracts any employee-paid after-tax contributions to the coverage. The law stipulates that if an employee contributes to the total cost of coverage, then the amount of the employee contribution is to be subtracted from the total cost of coverage. The resulting amount is considered the taxable benefit, the amount that is included in the employee's taxable gross.

    Note: The system only factors in after-tax deduction classifications; before-tax deductions are ignored. The system does not take into account any one-time paysheet adjustments, but rather recalculates these at the end of the year.

    The resulting amount is added to the employee's taxable gross on the paycheck record. You can view this amount using the Paysheets, Paycheck Deductions page. It appears as the Taxable Benefit under the appropriate group-term plan type and deduction code.

Imputed Income Calculations in Action

Let's look at a few examples, ranging from the straightforward to the complex.

Topics

Example 1: U.S. Calculation

Example 2: Canadian Calculation

Viewing the IRS Uniform Premium Table

Age-Graded Rate Table Page

Example 1: U.S. Calculation

An employee might be liable for imputed income, even if there is no employer contribution on all of the life insurance plans.

For example, Robert Altman, age 60, has basic life (employer- and employee-paid) and supplemental life (employee-paid):

20 Life $150,000
Employer-paid premium: $49
Employee-paid premium: $10

21 Suplmntl Life $200,000
Employer-paid premium: $0
Employee-paid premium: $100

As we've seen, if the employee has more than one type of life coverage, the system calculates imputed income in an iterative manner. The system calculates the first plan, basic life, as follows:

  1. Determine the total coverage. Robert's total coverage for basic life is $150,000.

  2. Subtract $50,000 from the total coverage.

    Total Coverage $150,000
    Exclude <$ 50,000>
    Subject to Imputed Income $100,000

  3. Apply the IRS Uniform Premium Table. Robert is 60 years old. In this age bracket, the Uniform Premium Table calls for a calculation of $1.17 per month per $1,000 of coverage.

    ($100,000/1,000) x $1.17 = $117

  4. Subtract any employee-paid after-tax contributions to the coverage.

    Result of previous calculation $117
    Employee contribution <$ 10>
    Robert's Taxable Benefit $107

Robert's Paycheck Deduction record looks like this:

20 Life After-Tax 10
20 Life Nontaxable Benefit 49
20 Life Taxable Benefit 107

Now the system calculates Robert's second plan, supplemental life:

  1. Determine the total coverage.

    Basic Life $150,000
    Supplemental Life $200,000
    Total Coverage $350,000

  2. Subtract $50,000 from the total coverage.

    Total Coverage $350,000
    Exclude <$ 50,000>
    Subject to Imputed Income $300,000

  3. Apply the IRS Uniform Premium Table. Robert's age of 60 calls for a calculation of $1.17 per $1,000 of coverage.

    ($300,000/1,000) x $1.17 = $351

  4. Subtract any employee-paid after-tax contributions to the coverage.

    Result of previous calculation $351
    Employee contribution <$110>
    Robert's Total Taxable Benefit $241

The system then looks at the initial $107 taxable benefit it has already calculated for Robert's basic life, and subtracts this from the total taxable benefit of $241 to arrive at the supplemental life taxable benefit:

Total Taxable Benefit $241
Basic Life Taxable Benefit <$107>
Supplemental Life Taxable Benefit $134

Robert's Paycheck Deduction record looks like this:

20 Life After-Tax 10
20 Life Nontaxable Benefit 49
20 Life Taxable Benefit 107
21 Supp After-Tax 100
21 Supp Taxable Benefit 134

Example 2: Canadian Calculation

Let's look at a Canadian employee who has three plans:

20

Life

$100,000

Employer-paid premium: $50
Employee-paid premium: $50

$1 per $1,000

21

Supp Life

$150,000

Employer-paid premium: $50
Employee-paid premium: $100
$1 per $1,000

25

Dep Life

$50,000

Employee-paid premium: $50
(All employee-paid—no taxable benefit)

  1. Determine total life insurance coverage for plans subject to taxable benefits.

    Life $100,000
    Supplemental Life $150,000

  2. Determine the percentage of total for each plan.

    Life 40%
    Supplemental Life 60%

  3. Calculate the taxable benefit based on the actual cost to the employer.

    Life $100,000/1000 x 1 = $100
    Supplemental Life $150,000/1000 x 1 = $150

  4. Subtract any employee-paid after-tax contributions to the coverage.

    20 Life $100 - $50 = $50
    21 Supplemental Life $150 - $100 = $50

The employee's Paycheck Deduction record looks like this:

20 Life After-Tax 50
20 Life Taxable benefit 50
21 Sup After-Tax 100
21 Sup Taxable benefit 50
25 Dep After-Tax 50

Viewing the IRS Uniform Premium Table

In performing U.S. calculations, once the total coverage for an employee is determined, the system uses the Uniform Premium Table to establish the amount to be included in the employee's taxable gross. PeopleSoft stores the information of the Uniform Premium Table on the Age Graded Rate Table. IRS is the Age-Graded Rate Table ID (key) for the information from the Uniform Premium Table.

Age-Graded Rate Table Page

This information is covered in the PeopleSoft Base Benefits PeopleBook.

For more information about the Age-Graded Rate Table page, see Age-Graded Rate Table Page .

Adjusting Imputed Income for U.S. Employees

PeopleSoft Payroll addresses imputed income every pay period. Although imputed income calculations are accurate with the information available in any given pay period, adjustments may be required at the end of the year, as a result of changes in coverage or an employee being terminated. If you need to make such adjustments, you can use the Imputed Income Adjustment (IMPCALC) process.

Note. Before running Imputed Income Processing, you must have already established the taxable benefit deduction you plan to use for adjustments. You can either use an existing deduction code of 20-29 or establish a new deduction code solely for adjustment of imputed income.

Topics

Modifying Imputed Income

Imputed Income Adjustment - Imputed Income Page

Viewing Results

Example

Modifying Imputed Income

Imputed Income Adjustment performs calculations and creates a file containing one-time adjustment records for all employees who require them. You can review the calculation results using SQR PAY033, the Imputed Income Adjustments report, before loading the transactions into paysheets.

When you're ready to load the imputed income transactions into paysheets, you run Imputed Income Processing in Update Paysheets mode, and the system makes the adjustments as one-time deductions with a Deduction Classification of Taxable Benefit. The system establishes these one-time deductions as off-cycle manual checks (paylines).

The manual checks created by Imputed Income Processing do not have an amount in the Total Gross and Net Pay fields. This is not necessary, because the imputed income adjustment that is created is a taxable benefit deduction class, and it does not affect gross or net pay.

When Imputed Income Processing creates the adjustment paysheet, it defaults the Deductions Taken flag on the Paysheet One-Time Deductions page to None. This prevents the normal taxable benefits and employer deductions from being taken on the adjustment check.

Imputed Income Processing cannot be rerun. For example, let's say you run the process once and it produces an error after loading some paysheets. If you run it again using the same run control information (the same Company, Pay Group, Pay End Date, Date Range, and so on), you get an error again, because the system attempts to insert duplicate rows into the database. Therefore, if you need to rerun the process, you need to delete the paysheets that the process added previously.

It's a good idea to attach your adjustment paysheets to a Pay Calendar that does not contain any other off-cycle paysheets. In other words, there should be no other off-cycle paysheets entered for the same calendar on which the imputed income adjustments are created.

Imputed Income Adjustment - Imputed Income Page

Usage

Use the Imputed Income page to calculate imputed income adjustments, update paysheets with the adjustment amounts, or both.

Object Name

RUNCTL_IMP_CALC

Navigation

  • Compensate Employees, Manage Payroll Process (US), Process, Imputed Income Adjustment, Imputed Income

  • Compensate Employees, Manage Payroll Process (USF), Process, Imputed Income Adjustment, Imputed Income

Prerequisites

None

Access Requirements

Enter a Run Control ID.

Run Control ID

The run control ID you specified in the entry page displays here.

Off-Cycle Pay Calendar

Company

Select the company for the off-cycle pay calendar you would like to process.

Pay Group

Select the pay group for the off-cycle pay calendar you would like to process.

Pay End Date

Select the pay end date for the off-cycle pay calendar you would like to process.

Tax Year

Specify the tax year you want to process.

Process From Month

Enter a numerical value for the first month beginning the date range. (Ordinarily, this is 1 through 12—January through December.)

Thru Month

Enter a numerical value for the last month ending the date range. (Ordinarily, this will be 1 through 12—January through December.)

Processing Mode

Calculate Imputed Adjust Only

Calculates imputed income for the selected period and creates transaction files, but does not load the transactions into paysheets.

Update Paysheets Only

Loads calculated imputed income transactions created in a previous run into paysheets as one-time deductions.

Both

Calculates imputed income and creates transaction files, then loads the transactions into paysheets as one-time deductions.

Use these options as necessary:

  1. Run the process in Calculate Imputed Adjust Only mode.

  2. Run SQR PAY033, the Imputed Income Adjustments report, and review the results.

  3. If the results are acceptable, run the process in Update Paysheets Only mode to load the transactions into paysheets.

  4. If the results are not acceptable, fix the problems and go back to Step 1.

Apply GTL/DPL adjustments to

Use the Apply GTL/DPL adjustments to group box to tell the system the deduction codes to which you want the imputed income transactions to be applied when it loads the transactions into paysheets. For DPL Effect, you must have a row for Add to DPL and a row for Add to GTL. For each of these rows, specify the Plan Type, Benefit Plan, and Deduction Code.

Note. Under ordinary circumstances, your run control has only two rows in the Apply GTL/DPL adjustments to group box. Even if some employees have more than one GTL or DPL plan, the process applies their adjustments to a single plan, one for GTL and one for DPL.

Note. The Deduction Codes must be valid for all employees in the run.

DPL Effect

Use this field to indicate the type of adjustment you are making (Dependent Life or Group Term Life).

Plan Type

Use this field to indicate the Benefit Plan Type you are adjusting.

Benefit Plan

Use this field to indicate the Benefit Plan you are adjusting.

Deduction Code

Use this field to indicate the Deduction code to use for entering the adjustment on the paysheet.

Run

Click to access the Process Scheduler request page, where you can specify where a process or job runs and the process output format.

 

For more information about the PeopleSoft Process Scheduler, see Process Scheduler in your PeopleSoft PeopleTools PeopleBook.

 

Note. This COBOL process takes one or two minutes to process each employee. If you have a lot of employees, the process could take hours or even a full day.

Viewing Results

You can view the results of imputed income calculations by running SQR PAY033. You can run this SQR by selecting Compensate Employees, Manage Payroll Process, Report 1, Imputed Income Adjustment Rpt.

Note. If you used the process to load transactions into paysheets, you can use the Paysheet or Payline pages to view the one-time deductions.

For more information about running reports, refer to PeopleTools Reporting; for a sample of this report, see Overview of Payroll for North America Reports .

Example

Joanne DeHaven is a CCB employee in a monthly pay group; her coverage changes in the middle of the year. From January 1 to June 30 she has basic and supplemental life. Her basic life is fully employer-paid; her supplemental life is fully employee-paid.

20

Life

$25,000

Employer-paid premium:

$15

21

Supplemental Life

$25,000

Employee-paid premium:

$1.25

Because the IRS does not consider the first $50,000 of coverage taxable, PeopleSoft Payroll performs no imputed income calculations for Joanne during the first half of the year.

On July 1, however, Joanne suddenly gets a big increase in her basic life coverage:

20

Life

$50,000

Employer-paid premium:

$30

21

Supplemental Life

$25,000

Employee-paid premium:

$1.25

Because Joanne now has coverage totaling $75,000, starting with the next payroll after July 1, $25,000 will be considered taxable as imputed income. Joanne is 37 years old. In this age bracket, the Uniform Premium Table calls for a calculation of $.11 per month per $1,000 of coverage:

($25,000/1,000) x $.11 = $2.75

The system then subtracts Joanne's employee-paid after-tax contribution to the coverage:

Result of previous calculation $2.75
Employee contribution <$1.25>
Joanne's Taxable Benefit $1.50

These calculations will be correct beginning with the end-of-July Payroll. However, the IRS stipulates that any contributions made by the employee need to be factored into the equation. In Joanne's case, this means that all her contributions made from January 1 to June 30 must be included; the result is a reduction in her true tax liability for the year as a whole.

At the end of the year, Imputed Income Processing recalculates Joanne's imputed income, without subtracting her monthly contributions, for every month of the year, and adds up the monthly figures to arrive at a total. Then it adds up her monthly contributions. This chart shows the process:

Month

Imputed
Income

Employee
Contribution

January

0

$1.25

February

0

$1.25

March

0

$1.25

April

0

$1.25

May

0

$1.25

June

0

$1.25

July

$2.75

$1.25

August

$2.75

$1.25

September

$2.75

$1.25

October

$2.75

$1.25

November

$2.75

$1.25

December

$2.75

$1.25

Totals:

$16.50

$15

Joanne's total imputed income for the year is $16.50; her contributions amount to $15. On this basis, her taxable benefit for the year should be only $1.50 ($16.50 - $15). But in fact, because the system is calculating her taxable benefit on a month-by-month basis, her taxable benefit is $9 (6 months x $1.50 per month). In short, Joanne's taxable benefit for the year must be reduced by $7.50:

Total Taxable Benefit
from Month-by-Month Calculations: $9
Total Taxable Benefit
from End-of-Year Calculation: <$1.50>
End-of-Year Adjustment: $7.50