Short term disability deductions

[Guest lmrice]

If employees are enrolled in individual short term disability and/or cancer protection plans (not employer sponsored group plans), but have the premiums deducted via payroll deductions, can these deductions be taken out on a pre-tax basis?

[Joe Priselac]

Yes, these premiums can be deducted pre-tax. However, the employees should be made aware of the fact that the benefits from the disability policies will become taxable income and any benefits from the cancer plans that exceed actual medical expenses are also taxable income.Many people after hearing that the benefits become taxable opt to have the premiums deducted after-tax especially if the premiums are relatively low.

[Guest lmrice]

Thanks Joe. I appreciate the response and information.

[SLuskin]

And of course you have to have a plan document which permits this, and file a 5500 for the Cafeteria Plan at the end of the year.

[GBurns]

Joe,

Can you give any cites for the cancer benefits being taxable income, if premiums were paid on a pre-tax basis?

[Joe Priselac]

GBurns,

IRC Section 105 is where I would look to for the reasoning

that certain benefits could be taxable. Reg 1.105-2 covers amounts that are excludable from taxable income. It refers you to Section 213 to determine what kinds of medical expenses are eligible. Regulation 1.105-2 states that "However, the exclusion does not apply to amounts which are attributable to (and not in excess of) deductions allowed under section 213..." Since a taxpayer can not attempt to deduct more than the actual medical expenses incurred, it would seem logical to assume that if the taxpayer were reimbursed for an amount greater than the actual medical expenses incurred they would have to include the excess amounts in their taxable income. Perhaps some of the tax attorneys out there could shed some light, or should I say, poke some holes into my reasoning.