SR Client Question: Are disability benefits paid out under an employer group disability plan taxable to the employee?
If an employer offers group term disability insurance as a fringe benefit to employees, any benefits received under this plan are typically taxable to the employee. However, according to IRS Revenue Ruling 2004-55, the employer has the option to design the plan so that employees can annually elect whether or not to include the premiums in their taxable wages. If the plan currently lacks this flexibility, the employer can amend it to incorporate this choice.
When premiums are included in the employee’s taxable income, the benefits themselves are not subject to taxation. Nevertheless, as per IRS Revenue Bulletin 2004-26, there exists a three-year lookback period for disability benefits. This means that if any portion of the premiums was not taxed in the previous three years, the taxable amount of the benefits will be determined based on the ratio of untaxed premiums to the total premiums paid during that period.
If you have questions about the taxation of disability benefits and premiums paid, please contact your ShindelRock tax professional.