Are Group Long-Term Disability Benefits Taxable?
By Tom Jocz, Senior Employee Benefits Practice Lead
Answer: Possibly
Typically, group disability benefits are taxable, but there are scenarios where they can be tax-free to the member. The taxability of the benefit is determined by 'who’ is paying for the benefit and ‘how’ they are paying for it.
In most cases, employers pay Long-Term Disability (LTD) premiums on a pre-tax basis. When an employee receives benefits from the plan the benefits are reported as income and taxes are taken out, effectively lowering the benefit provided. This is often a shock to the employee - they have been expecting a Long-Term Disability benefit of 60% of their salary, but it may be much less based on the taxes taken from that benefit.
A group disability program can be a tax-free benefit if the premiums are paid post-tax vs pre-tax regardless of the employer or employee paying that cost. Post-tax contributions allow the benefit paid out to be tax-free.
There may also be a scenario where there is a premium share of the contributions. If the employee is paying a portion of the premium with post-tax dollars, and the employer is paying a portion as well, only the percent of the premium that the employer is contributing is taxable if paid by pre-tax dollars.
Creative employers have also charged the employee the post-tax amount for the disability insurance premium, then grossed up that employee's paycheck to cover the cost of the disability premium payment. This keeps the plan an "employer-sponsored" benefit without the taxability of that benefit.
BE CAREFUL OF SSDI OFFSET!
An employee may receive Social Security Disability Income (SSDI) and Long-Term Disability benefits at the same time. Some LTD plans allow the insurance company to offset Social Security disability insurance (SSDI) payments. This may mean that a lower LTD benefit would be paid as the benefit may be reduced by the amount of Social Security received.
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