Tax-Free, or Not? Disability Plans Depend on Designation

For More Clarity, Get Your Info Kit From Assurant Employee Benefits

One of the most common questions from employers and their employees is whether their disability plan benefits are taxable when received. Generally, the short answers are: Yes, if premiums are paid solely by the employer. No, if premiums are paid by the employee with after-tax dollars.

However, even benefits from employee paid plans may be taxable. Taxability of some or all benefits depends on whether the plan is designated as a ?2004-55 arrangement? or is a so-called ?gross-up arrangement.?

Assurant Employee Benefits has created a new, valuable information kit to help you with questions and guide you as to the necessary steps to achieve the tax results you desire.

What?s the Difference?

If the employer properly designates its disability plan as a 2004-55 arrangement, and an employee irrevocably elects, prior to the beginning of the plan year, to have the premium paid for with after-tax dollars, then the benefits will be received tax free.

In contrast, if an employer does not designate the plan as a 2004-55 arrangement but simply chooses to ?gross-up? the employee?s compensation to reflect the value of the premium, certain rules, including a three-year look back rule, may cause all or part of the disability benefit received to be taxed, even though the current premium was paid for with employee after-tax dollars.

With either arrangement, it is up to the employer to implement, but only under a 2004-55 arrangement do employees have a choice ? to continue to have the employer pay 100 percent of the premium, or to ?pay? the premium themselves on an after-tax basis.

Your Carrier Cares

Employees may only think about their disability plan when they need it, but it?s no time to find out the percentage of income replaced is less than they thought it would be because it is taxed.

You need basic knowledge of these arrangements. That?s why we have teamed up with Assurant Employee Benefits to provide you with the guidance needed on such topics as:

? description of IRS Revenue Ruling 2004-55
? employer FAQs
? side-by-side 2004-55 gross-up comparison
? sample forms and employer documents
? employer checklist