Taxes on life insurance
According to Section 79 of the Internal Revenue Code, the first $50,000 of an employer-provided group life benefit can be excluded from compensation. For those employees who receive group life insurance coverage over that amount, you must include the cost of the excess insurance as taxable income to the employee.
Employees benefit when you pay disability premiums post-tax
Paying disability insurance premium on a post-tax basis increases the payable monthly benefit an employee receives while on claim1. Here are some examples that show how paying the premium post-tax increases the benefit employees receive.
Employee earning $36,000 per year
(Assumes 25% tax bracket)
|Gross Monthly Income||$3,000||$3,000|
|Take Home Pay||$2,250||$2,250|
|Gross Monthly Benefit||$1,800||$1,800|
|Tax on Benefit||$450||$0|
|Payable Monthly Benefit||$1,350||$1,800|
Employee earning $150,000 per year
(Assumes 35% tax bracket)
|Gross Monthly Income||$12,500||$12,500|
|Take Home Pay||$8,125||$8,125|
|Gross Monthly Benefit||$7,500||$7,500|
|Tax on Benefit||$2,625||$0|
|Payable Monthly Benefit||$4,875||$7,500|
1. This rule applies to disability programs that are set up with the employer paying 100% of the premium (non-contributory), the employer and employee sharing in the cost of coverage (contributory), or coverage where the employee pays 100% of the premium (voluntary). "Tax Choice" disability plans (IRS Revenue Ruling 2004-55) are not subject to the three-year look-back rule. Amending a disability program to be "Tax Choice" makes the plan exempt from the three-year look-back rule immediately.
2. The replacement ratio is calculated by dividing the payable monthly benefit by take home pay.
Group disability tax implications
Since group disability benefits can be structured a number of ways, understanding the tax implications for your business can be challenging.