is long term disability

The majority of people believe that disabilities only affect other people, however, they actually occur more frequently than you might imagine.

When an employee is unable to work for an extended length of time due to illness, injury, or accident, long-term disability insurance (LTD) protects them from losing their income. Without the financial security that comes from long-term disability insurance coverage, this can financially ruin a family. You might also be wondering if long term disability is taxable.

Employers typically offer and cover long-term disability insurance. Many employers cover the cost of the policies. Some employers offer a base coverage and then the employee can buy up the coverage.  Employers can choose from a wide range of programs to include as part of a comprehensive employee benefits package.

Some people acquire an individual long-term disability plan from an insurance agent if their employer doesn’t provide long-term disability insurance or if they want more coverage than their employer offers.  We recommend individual disability coverage as the law governing privately purchased disability policies is more protective.

Employer-provided long-term disability insurance might not be sufficient to cover a disabled or handicapped employee’s financial needs. The second justification for why workers could think about getting extra long-term disability insurance via private purchase is the non-taxability of the benefit.

How Much Does Disability Income Cost?

A well-constructed individual long-term disability plan should replace 60% to 70% of your pre-disability earnings. These benefits, nevertheless, come at a price: An extensive private long-term disability plan should cost you between 1% and 3% of your yearly salary.

The price of LTD plans varies widely since a variety of factors, such as your age, health status, income level, and occupation, have an impact on the cost. The policies can be completely customized as well: For instance, you can select a benefit period (i.e., the maximum time frame during which you can get income) that is as little as two years or as long as retirement age, which increases the cost.

Accordingly, an individual making $100,000 can anticipate paying $83 to $250 per month.

You may be able to purchase a more individualized individual long-term disability insurance plan from an insurance provider, or your employer may include group-rate LTD insurance as part of your employee benefits package.

Pre-Tax and Post-Tax Disability Taxation

It is essential to consider who pays the insurance policy payments when evaluating if long-term disability benefits are taxable. For employer-sponsored plans, there are three options: the employer can pay the entire premium, they can withhold 100% of the premium from the employee’s compensation, or they can withhold less than 100%, in which case a prorated amount for each of the various payments can be decided. This may be a 40/60 or 50/50 employer/employee split.

The employer’s payments are not counted toward the employee’s gross income in any of these cases. Because they are made with pre-tax funds, the premium payments are not included on the employee’s W-2 statement for the year. The benefits earned when contributions are made with pre-tax money are taxable. On the other hand, benefits earned when premiums are paid with after-tax money are tax-free.  If the employer pays the whole premium for coverage then the benefits are 100% taxable.

IRS Regulations

Gross income, unless otherwise specified, includes remuneration for fringe benefits. Therefore, if an employee who becomes disabled receives monthly benefits as a result of the employer paying the LTD insurance premiums, the monthly benefits are regarded as gross income and are taxed accordingly.

However, LTD benefits given out under insurance whose premiums were entirely covered by the employee (on an after-tax basis) are completely tax-free. The prorated share of premium payments is used to determine what percentage of the long-term disability benefits are taxable if the employer and employee both make joint contributions. For instance, the benefits provided by the Policy are 50% taxable if the employer pays 50% of the premium cost.

The IRS receives its tax revenue in one of two ways: either through taxes paid on money used to purchase insurance or through taxes paid on disability payments received.

Is Disability Income Taxable Federally?

Whether you must pay taxes on a policy depends on its type, who paid for it, and whether pre- or post-tax funds were used. Employer-paid short-term disability and long-term disability income are subject to federal tax, thus the income needs to be disclosed on your tax return. If you have enough additional income, your SSDI disability benefits may be treated as taxable disability income and be liable to federal income tax.

What Medical Conditions Qualify for LTD?

Some of the medical conditions that qualify for LTD include but are not limited to:

  • Cancer
  • Cerebral Atrophy
  • Chronic Fatigue Syndrome
  • Chronic Pain
  • Chronic Obstructive Pulmonary Disease (COPD)
  • Covid-19 Coronavirus
  • Crohn’s disease
  • Depression
  • Diabetes
  • Epilepsy
  • Epstein-Barr virus
  • Asthma
  • Bipolar Disorder
  • Brain Injury
  • Chronic Pain
  • Eye conditions
  • Irritable Bowel Syndrome (IBS)
  • Lyme disease
  • Meniere’s disease
  • Rheumatoid Arthritis
  • RSD/Complex Regional Pain Syndrome
  • Shoulder Disorders

You should be aware that certain long-term disability insurance will place a time limit on how long you can get benefits. So, if you have fibromyalgia, a mental illness, or even soft tissue musculoskeletal issues, your coverage may only pay you benefits for 24 months.

For a full list of medical conditions that qualify for long term disability, click here.

How Long Does Long-Term Disability Insurance Last?

People who work in certain sectors or specialty professions that depend on a specific set of talents are especially well-served by long-term disability insurance that lasts until retirement age.

For example, performing operations requires fine motor skills for doctors, dentists, and nurses. By obtaining long-term disability insurance that lasts until retirement, people can safeguard their future income if a handicap stops them from employing those abilities.

When the benefit period expires, the insurance company will stop paying you disability benefits. You can apply for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) if you still require help.

Contact Aaron Engle Law Today!

Should you have any further questions about whether your long-term disability is taxable, don’t hesitate to contact Aaron Engle Law today! Our team of trained professionals will be more than happy to discuss your case with you.