This Tax Tip Spotify Podcast and/or WordPress Blog Post understands that you have the opportunity to obtain disability coverage through your employer, and that you have questions regarding the tax treatment of any benefits you may receive under that 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 you benefits when you are unable to work due to, for example, injury or sickness. If you buy disability coverage entirely with your own after-tax funds (either independently or through your employer), you can exclude the full amount of any disability benefits you receive under the arrangement.
The result is different if any part of benefits you 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 you receive are included in your gross income to the extent those benefits:
- are attributable to employer contributions that were not includible in your gross income, or
- are paid by the employer out of its own funds.
If your employer is either the sole contributor to a disability fund, or is the sole purchaser of disability insurance coverage, any disability benefits you receive under the plan are fully taxable to you. If you pay disability insurance premiums through a pre-tax salary reduction arrangement, so that the amount of the premium was not included in your taxable income, the premiums are considered paid by the employer; therefore, any disability benefits you receive under the plan are attributable to untaxed employer contributions and are thus fully taxable to you.
Please call me at your convenience so we can discuss in more detail the tax implications of obtaining disability coverage through your employer.
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 05012021-1 320-365)