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Are Long-Term Disability Insurance Benefits Taxable?

Our clients often want to know whether the monthly benefits they’ll receive from an individually purchased or employer-sponsored group long-term disability insurance policy will be subject to federal or state tax liability.

While there are certain guiding principles that play a role in answering this query, it’s best to get real tax help to be certain. The rules in this area are complex, and our specialty is in dealing with short- and long-term disability insurance claims, not tax disputes.

However, there are some insights we can share, as it is a crucially important consideration for the claimants our attorneys work with.

What Does the IRS Say About Tax on Long-Term Disability Insurance Benefits?

The Internal Revenue Service (IRS) offers some guidance on the question of tax liability arising from long-term disability insurance benefits. It indicates that the key consideration is who paid the premiums; was it you, or your employer? Or did you share the expense?

According to the agency, benefits are fully taxable where you receive a policy as a benefit from your employer. On the other hand, when you purchase coverage yourself using post-tax dollars, you generally will not have to pay any tax on the monthly benefits.

The IRS also states that any money your employer pays you while you’re out of work due to an illness or an injury should be regarded as taxable income and reported as such.

It’s important to note that the taxability of income from disability insurance benefits is not something you can negotiate following the submission of a claim. Your status in this regard will be defined by how your policy premiums were funded while you were working, before you developed your disabling illness or injury. However, if you feel your situation has been misrepresented and that you’ve ended up with an unfair tax burden, you should discuss this with a tax professional to try to rectify the situation.

Individually Purchased Long-Term Disability Insurance

If you purchase long-term disability insurance coverage by yourself, without any help from your employer, you will likely escape tax liability on the monthly benefits you receive following a successful claim.

An exception may occur if you pay your premiums using pre-tax dollars. Some policyholders can fund their disability coverage using a portion of their gross income, which is the money they have prior to the deduction of federal, state, or local taxes. This makes their premiums cheaper, but could also mean they will have to pay income tax when they start receiving monthly disability benefits. If you’re not sure whether you availed of this option when paying your policy premiums, you should consult with a tax specialist.

Another important point to note is that individual long-term disability insurance premiums are not generally tax-deductible. This is a misconception among many people because premiums on medical insurance are deductible for many taxpayers.

Employer-Sponsored (ERISA) Long-Term Disability Insurance

Many employers provide their workers with long-term disability insurance policies as an employee benefit. Unlike private long-term disability insurance plans, employer-sponsored policies are governed by a body of federal legislation called the Employee Retirement Income Security Act of 1974 (ERISA). When you receive monthly benefits from a policy like this, you’ll generally have to report them as taxable income.

You may split the cost of your long-term disability insurance policy with your employer. In this case, you will likely have to pay income tax on the portion of your monthly benefits arising from the premiums paid by the company. Your tax liability (or lack thereof) in relation to the remainder will depend on whether you used pre- or post-tax dollars to pay for your premiums. This may arise through a so-called “cafeteria plan,” where workers can choose from a range of benefits and contribute to payments on a pre-tax basis. Again, the best way to resolve any uncertainty is to contact a tax consultant.

Getting the Help You Need With Your Long-Term Disability Insurance Claim

Ultimately, we don’t give clients advice on their tax situation, as that is not our area of specialization. If you have concerns about the liability you may incur following a successful claim for long-term disability insurance benefits, you should consult a tax professional.

However, if you’re struggling with a long-term disability insurance claim or appeal, our attorneys can help you in any way you require. Contact DarrasLaw today to schedule an initial consultation with one of our award-winning lawyers. We’ll provide a free policy analysis, claim assistance, or appeal analysis during your initial meeting.

Remember, if your ERISA insurer has denied your claim, it’s imperative that you start the process of responding as early as possible to compile as comprehensive and timely administrative appeal as you can be ahead of the relevant deadlines. Contact our Ohio ERSIA Lawyer.

DarrasLaw is Americas' most honored and decorated disability litigation firm in the country. Mr. Darras has seen more, evaluated more, litigated more, and resolved more individual and group long term disability and long-term care cases than any other lawyer in the United States.

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