Group Disability Insurance - Benefits and Income Tax Implications

Benefit Determination

The employer and insurer determine the monthly income replacement percentage based upon what the employee earned prior to the onset of disability. Short-term policies may replace anywhere from 50% to 100%; long-term policies often replace 60% of income. Plans typically require that the employee satisfy an elimination period. It is the period of time for which benefits are NOT paid after you file a claim. The elimination period begins the day after your last day worked (LDW) and stops on the last day indicated in your policy. This means if your plan has a 90 day elimination period, benefits would begin on the 91st day after your last day worked.

Income Tax Implications
Benefits that a disabled employee receives are tax-exempt for that portion of the premium that the employee pays and taxable for that portion of the benefit that the employer pays. Taxable may be defined as being subject to federal and state income and FICA tax.

Conversion to Individual Plan
Group disability policies are usually neither portable nor convertible when one leaves one's employer.

Integration with Other Income
Benefits may be offset by any payable under social security, worker's compensation or coverage from another disability in force. Examples of other sources of income that would not be used to offset benefits payable under a group policy are:

  • 401(k) plans
  • profit sharing plans
  • thrift plans
  • tax sheltered annuities
  • stock ownership plans
  • non-qualified plans of deferred compensation
  • pension plans for partners
  • military pension and disability income plans
  • credit disability insurance
  • franchise disability income plans
  • a retirement plan from another Employer
  • individual retirements accounts (IRAs)
  • individual disability income plans
  • salary continuation or accumulated sick leave plans.

Analysis and Application
A financial planner is of value to the client who may well need assistance in navigating the rules of a group plan to determine eligibility, extent and duration of coverage, taxability of benefits and the submission of a claim.

Group disability insurance is a critical piece of any benefit package, yet not offered sufficiently by employers. Many of the provisions that apply to individual plans in terms of definition of disability, benefit provisions and length of benefit period apply to group plans equally. Different are the simplified underwriting requirements and lower cost afforded participants under group arrangements. Planners and their clients would do well to understand how these policies work and how to benefit from them.

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