Disability Insurance: Long Term: Group

Whether or not your benefits are taxed depends on how the premiums were paid. Either the premium or the benefits will be taxed, but not both.

In general, this means:

If the employer pays for the Long Term Disability plan: Any benefits you receive will be taxable as ordinary income.

If you pay all the premiums with pre-tax dollars: The benefits are subject to income tax.

If you pay all the premiums with after-tax dollars: The benefits are not-taxable. If you pay the entire cost through payroll deduction with dollars that will be included in your W-2, then the premiums are paid with after-tax dollars.

If you pay a part of the premiums with after-tax dollars, and your employer pays the remainder: You will only be taxed on the portion that your employer paid -- in the same proportion as payment for the premiums. For Example: If your employer pays 70% of the premium and you pay 30% through payroll deduction, then 70% of each benefit check will be taxable and 30% won't.

If your employer has been paying the premiums for your disability coverage: If it looks as if you will be going onto disability in the future, while you are still working, consider asking whether your employer will allow you to reimburse the premium payments at least for the policy year which covers the year when you go on disability. Preferably also reimburse the employer for the year before that as well. This arguably should allow you to receive disability payments income tax-free.

While there have been no cases on point, in theory this should be permissible. The suggestion is from a benefits tax expert who suggests that the additional period is more likely to provide the desired tax result. Do not attempt to do this without consulting with a tax advisor prior to speaking with your employer.

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