This Tax Tip Spotify Podcast and/or WordPress Blog Post understands that you are considering offering your employees the opportunity to obtain Disability Coverage through you, and that you are seeking general information regarding the tax treatment of any benefits they may receive under such an arrangement. The tax treatment of these benefits depends to a large extent on the way they are funded.
Disability coverage whether provided through an insurance company or through an employer funded disability fund pays employees benefits when, for example, they are Unable to Work Due to Injury or Sickness. If employees buy disability insurance entirely with their own after-tax funds (either independently or through you, the employer), they can exclude the full amount of any disability benefits they receive under the arrangement.
The result is different if any part of benefits the employees receive is attributable to employer contributions, including contributions the employer makes toward the purchase of Disability Insurance Coverage for employees (on either a group or individual basis) and contributions the employer makes to a disability fund for employees. In that case, the disability benefits the employees receive must be included in the employees’ gross income to the extent those benefits:
- are Attributable to Contributions by the Employer that were not includible in the gross income of the employees, or
- are paid by the employer.
If employees pays disability insurance premiums through a pre-tax salary reduction arrangement, so that the amount of the premium was not included in the employees’ taxable income, the premiums are considered paid by the employer. Thus, any disability benefits the employees receive under the plan are attributable to Untaxed Employer Contributions and are fully taxable to them.
In the case of disability benefits an employees receives through a Disability Plan that is financed partly by employer and partly by employee contributions, a separate determination of the portion of the benefits that is attributable to employer contributions must be made for each class of employees in any case where the plan provides that some classes of covered employees contribute but others do not, or that the employer will make different contributions for different classes of employees, or that different classes of employees will make different contributions.
If the disability coverage is provided under, or is part of, a group insurance policy purchased by both employer and employee contributions and the net premiums for the coverage for a period of at least three policy years are known at the beginning of the calendar year, the portion of any amount received by an employee that is attributable to employer contributions for that coverage is an amount that bears the same ratio to the amount received as the portion of the net premiums contributed by the employer for the last three policy years that are known at the beginning of the calendar year bears to the total of the net premiums contributed by the employer and all employees for such policy years. This is known as the “Three Year Look Back Rule.”
Please call me at your convenience so we can discuss in more detail the tax implications of offering Disability Coverage to your Employees.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
Cell: (760)567-3110
Fax: (760)836-0968
Email: DonFitchCPA@paylesstax.com
Website: https://www.paylesstax.com
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 05202021-1 320-366)