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STD and LTD premiums - Imputed Income to EE's?

Guest CHogan

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I'm wondering if there is a way to have our EE's STD and LTD benefits non-taxable to them. We the employer pay the premiums. Can i report the employer paid premiums as imputed income for each EE in order that their benefits, when used, would be tax free?

Does this fall under ERISA?

Pls. advise!


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Yes, di premiums can be structured to become non-taxable, but I doubt that you would want to do it. If the premium becomes non-taxable, then the disability payment to the disabled employee becomes taxable. Let's assume a 25% tax, a premium of $40 and a monthly benefit of $1000 (helps the math challenged people like me). The $40 prem creates a tax of $10 to the employee, but if the $1,000 were taxed, it would be $250. Also, during disability periods, the disabled person can actually see an increase in their expenses.

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I think the question is how to provide the DI/STD/LTD benefit tax free.

Your options are pretty limited, short of having EEs pay DI/STD/LTD replacement income premiums w/taxable income, resulting in non-taxable benefits.

Di/LTD/STD replacement income is typically 60% (+ or -) of earned income. Based on $1,000 earned income, 60% replacement income of $600, less taxes of approx. 24%, or $144 withholding income taxes, for a total replacement income of $456.00 after taxes, the result could be significiant financial hardship.

For plans w/EE paid DI/STD/LTD, providing EE's the option of either pre tax or after tax premium payment, allowing EEs the option to decide if they wish to continue paying tax on a premium they have never collected a benefit from, a point which some EEs can be adamant about, or those EEs who see the wisdom of tax free replacement income.

If there are other payroll deductions such as health insurance premiums, funding FSAs, high medical expenses a result of the disability, to consider deducted from the 60% replacement income.

Also, consideration for ERs payroll tax consequences.

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