Taxing Disability Premiums
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Following an audit of our benefit plan, our insurance broker recommended a change regarding our STD benefit.
Presently, our company pays 100% of the premium for STD coverage, which amounts to 60% of an employee's weekly base pay capped at $5k./month. When someone is out on disability, that 60% is currently subject to applicable state and federal taxes.
The suggestion is to begin taxing the premium for all employees, whether they use the benefit or not. The taxable benefit would be added as other income on the employees W-2's and would not amount to significant dollars. (i.e. An EE earning $50k would see about an additional $160).
The result, employees on disability would receive the full 60% benefit.
Anyone heard of this or actually handling the STD this way?
Presently, our company pays 100% of the premium for STD coverage, which amounts to 60% of an employee's weekly base pay capped at $5k./month. When someone is out on disability, that 60% is currently subject to applicable state and federal taxes.
The suggestion is to begin taxing the premium for all employees, whether they use the benefit or not. The taxable benefit would be added as other income on the employees W-2's and would not amount to significant dollars. (i.e. An EE earning $50k would see about an additional $160).
The result, employees on disability would receive the full 60% benefit.
Anyone heard of this or actually handling the STD this way?
Comments
To answer your question, we began employing this practice.
I specifically asked about a situation we have coming up with an employee who is currently out on STD. He wants to elect this premium payment option at upcoming fall open enrollment, to be eff 1/1/04. His LTD would begin (if still disabled) in early February, so he would only be paying the taxes on the premium for approx one month. In this scenario, I was told that he would receive a "tax-free" benefit, regardless when he started paying the tax. That there were no time requirements.
It seemed odd to me, because I worked with a plan that had a buy-up option with employee contributions and when we had someone apply for LTD, the carrier required us to tell them specifically when the employee paid and for how long and what portion of premium did they pay it. But in this case, our vendor's contract is administered by our owner company, so I'm assuming they have this covered in the right way.