South Carolina Life and Health Practice Exam

How are disability income benefits from a group policy paid for by an employer treated for tax purposes?

1. Non-taxable income

2. Tax deferred income

3. Taxable income

4. Tax-exempt income

The correct answer is: Taxable income

Disability income benefits from a group policy paid for by an employer are treated as taxable income for the recipient. This means that if an employer pays the premiums for a group long-term disability policy, any benefits received by an employee during a period of disability are subject to federal income tax. This tax treatment arises because the employer's premium payments are considered a business expense and are tax-deductible for the employer. Consequently, the benefits are viewed as a form of compensation to the employee, thus rendering them taxable when received. The employee must report these benefits as income on their tax returns. In contrast, if employees pay for the premiums with after-tax dollars, the benefits received would be non-taxable. Understanding this tax implication is crucial for individuals relying on disability income benefits to manage their financial planning while disabled.