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Taxation of Long-Term Disability Benefits from Self Funded Plan

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Company long-term disability plan has two components:

1) company provided 50% of pay

2) voluntary employee buy up to 60%

There is no insurance, plan is self funded. There is no cost to the employee for the 50% base benefit (and no income is imputed) so any benefits received are subject to income tax. Employees pay for the buy up with after-tax payroll deductions so the incremental 10% benefits are received tax free.

The question is: can the employer impute income for the cost of the 50% base benefit so that all disability benefits received would be tax free? If so, since there is no insurance, and the plan is self funded, how would the company determine the amount to impute? Could they engage an actuary to set "rates" for the base plan? Would a composite rate suffice, or would they need to develop age based rates and impute accordingly?

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  • 2 weeks later...

I think that PLR200146011 should give you some insight.

There should be a COBRA rate already calculated by the Claims or Plan Administrator which you can adjust to calculate the imputed premium.

You should engage both an actuary and legal advice. Things might have changed since 2001. I noted that a cite is Rev Rul. 61-146. This is the same Rev Ruling that is cited in Notice 2013-54 regarding "Employer Payment Plans" which are no longer available. You should get legal advice to see if this is applicable to your case.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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