Most often, disability plans that require employee contributions be paid with post-tax employee dollars. If so, benefit payments are free of any tax liability. Some plans are paid with employees’ pretax dollars through Section 125 plans. By paying premiums with pretax money, the employee’s income is reduced, so they pay fewer taxes. However, this relatively small tax savings could become expensive in the event of disability, since all disability benefits that the employee receives will be taxable. An employee receiving a disability benefit is already dealing with an income level below pre-disability earnings. Paying taxes on a reduced income adds even more financial pressure on the claimant.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM