Taxes owed on LTD benefits depend on who pays premiums, and how

Q         If we pay the premium for employees’ long-term disability (LTD) benefits and they need to use LTD one day, would they owe taxes on the amount they receive?

A   There are two main types of LTD plans. The first is considered a Group Long-Term Disability Plan (Group LTD). A Group LTD is generally employer-sponsored and covers all eligible employees. You may choose to pay part or all of the premiums for the Group LTD.

Another type of LTD is called an Individual Disability Insurance Policy (IDI). An employee traditionally purchases an IDI policy through an insurance agent, not the employer.

Some employees opt to combine coverage, supplementing the employer-sponsored Group LTD with an IDI policy. Finally, some professional associations offer LTD plans. Examples include AMA- and ADA-sponsored policies available to physicians and dentists.

Every LTD has premiums that someone must pay. The payment for the premiums comes from either pre-tax dollars or post-tax dollars. Pre-tax dollars means income before any deductions for federal, state, and withholding taxes have occurred. Post-tax dollars means income after federal, state, and withholding taxes have been deducted. Whether the premium is paid from pre-tax or post-tax dollars determines the taxation of the LTD benefits.