Tax treatment of LTD benefits and 125 plans

[Guest pinsall]

Ltd is offered as a core benefit unde ra 125 plan.

It is after-tax

Does the fat that it is offered thru a 125 plan change the tax treatment when disability benefits become payable?

Thansk

Pat Insall

[Joe Priselac]

Since it is a core benefit there is no choice. You can include a description of the benefit on a customized enrollment form, but as long as the employer paid premium is included in the employee's taxable income the benefit will be rceived tax-free.

[Guest Dick Boever]

The key to whether disability payments are taxable is whether taxes were paid on the premiums. The question indicates this is an "after-tax" benefit. If this means the employer pays the premium, but those premium dollars show up as taxable income on the W-2, then the disability payments are not taxable. The same would be true if the employee paid the premium with "after-tax" dollars.

[Guest jlcowden]

Dick has nailed it he is 100% correct.

[KIP KRAUS]

DICK BOEVER:

If an employer is paying the full cost of a group disability plan, why would the premium be showing up as taxable income on an employee's W-2?

It has always been my understanding that group disability benefits paid for by the employer were fully taxable to the employee when he/she receives benfit payments. In addition, the benfit payments are only taxable on the portion paid for by the employer, i.e. if the employer pays 50% of the premium, 50% of the benfit is taxable.

I also was of the opinion that the % of cost paid by the employer is calculated on a three average and calculated each year.

Did I miss something?

[Guest jlcowden]

We have some clients who pay the cost of LTD but classify it as a non deductible employee contribution ; the premium amount is included as taxable income. Employees not desiring the coverage could hypothetically decline ...but of course that would raise questions about their common sense.

[KIP KRAUS]

jlcowden:

Let me see if I can grasp this concept. I've never heard of it, so I'm curiouos. The advantage to the employee is they don't have to pay taxes on their benefit payments, if and when they ever recieve them. On the other hand, the employee must pay federal, and maybe state income taxes on the premiums paid by the employer.

Who is gaining by this? The employer must have to pay fica on this W-2 income? Don't see the advantage to them.

The employee pays taxes on premiums in lue of taxes when benefits are recieved. I just don't see the advantage to them, especialy if they are most likely in a higher tax bracket while working as apposed to when they are disabled?

Again. I must be missing something.

[Guest jlcowden]

There may not be A RIGHT WAY but advantages of taxing EES on LTD premiums include:

* if the benefit is received tax free the amount of LTD carried can be lower eg; 60% vs 66%

* the lower benefit and lower premium offset lost ER Fica costs

* while employees working give up some tax break; those diabled and in the most need receive benefits pre tax in a time of need.

[Guest Dick Boever]

KIP KRAUS:

What you missed was the "after-tax" reference. After-tax implies taxes are paid on the premiums. In order for taxes to be paid the premium must be "classified" as an employee paid benefit. It really doesn't matter that the premiums were paid out of the employers' bank account, it is all just an accounting issue.

You are absolutely correct in stating a disability premium paid for by the employer would cause the benefit to be taxable upon receipt.

Don't you have some employers that want to include Disability insurance in their Section 125 Plan and some that don't? Some employers feel as you do; save the taxes on the premiums, disability may never happen. Others feel as jlcowden indicated, those on disability need the tax break much more than the small tax savings on the premium amount. Just a matter of your perspective.