Question

How does the IRS treat disability income benefits when the employer pays the policy premiums?

A. Benefits are not taxable.
B. Benefits are partially taxable.
C. Benefits are fully taxable.
D. Tax treatment depends on the policy type.

Answer 1

The tax treatment of disability income benefits when the employer pays the policy premiums depends on the policy type.

Step-by-step explanation:

When the employer pays the policy premiums for disability income benefits, the tax treatment depends on the policy type. If the policy is a group disability insurance policy, where the premiums are paid by the employer and the benefits are fully taxable to the employee. The employer can deduct the premiums as a business expense, and the employee must include the benefits as part of their taxable income.

However, if the policy is an individual disability insurance policy, where the premiums are paid by the employee with after-tax dollars, then the benefits are generally not taxable. Since the employee paid the premiums themselves, the benefits are considered a return of the employee's after-tax investment.