Tax Considerations for Employee Benefits

Taxes on life insurance

Did you know that the first $50,000 of an employer-provided group life benefit can be excluded from compensation (per the IRS)? For those employees who receive group life insurance coverage over that amount, you include the cost of the excess insurance as taxable income to the employee.

See life insurance IRS tax rules (PDF) for more information.

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.

60% Benefit Pre-Tax Premium
Gross Monthly Income $3,000
Take Home Pay$2,250
Gross Monthly Benefit$1,800
Tax on Benefit$450
Payable Monthly Benefit$1,350
Replacement Ratio260%
60% Benefit Post-Tax Premium
Gross Monthly Income $3,000
Take Home Pay$2,250
Gross Monthly Benefit$1,800
Tax on Benefit$0
Payable Monthly Benefit$1,800
Replacement Ratio280%

60% Benefit Pre-Tax Premium
Gross Monthly Income $12,500
Take Home Pay$8,125
Gross Monthly Benefit$7,500
Tax on Benefit$2,625
Payable Monthly Benefit$4,875
Replacement Ratio260%
60% Benefit Post-Tax Premium
Gross Monthly Income $12,500
Take Home Pay$8,125
Gross Monthly Benefit$7,500
Tax on Benefit$0
Payable Monthly Benefit$7,500
Replacement Ratio292%

Group disability benefit tax implications

Since group disability benefits can be structured a number of ways, understanding the tax implications for your business can be challenging.

View to help determine the plan type that best fits your needs (PDF)

 

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.

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