Pre-tax Disability and 2004-55

[sloble@crowleyfleck.com]

Under 2004-55, an employer can design its cafeteria plan to have employees pay disability premiums pre-tax, with the option to the employee to pay after-tax (and thus receive tax-free disability payments), provided that the employee makes an IRREVOCABLE ELECTION PRIOR TO THE BEGINNING OF THE PLAN YEAR.

So, the way I interpret this, if an employer decides to offer the pre-tax default payment option, an employee is going to be stuck paying tax on his disability payments UNLESS he can predict that he will be disabled in the next plan year and makes a corresponding election change.

Am I right?

[oriecat]

An employee who changed from pre-tax to after-tax might still be partially taxed on the benefits, due to the 3 years of premium rule.

[sloble@crowleyfleck.com]

I thought the three-year look back does not apply to this situation--isn't that what 2004-55 effectively does? See http://www.faegre.com/articles/article_1412.aspx.

My question concerns whether an employee must predict his disability prior to the begininning of the plan year in order to switch to after-tax treatment and receive tax-free benefits. I think he does.

[oriecat]

Well I didn't read it closely enough, sorry about that!

I would agree with you. We all have to become psychics so we can take advantage of this. I guess it would be easy if you knew you would be scheduled for a surgery or something, but otherwise I don't see how people would know to switch it.