Taxability of Benefits

You may recall my last blog was about knowing what your definition of disability is.  That is the first of two major components to being an informed consumer of your disability benefits program.  The second major component is the taxability of those benefits.

According to the National Association of Insurance Commissioners,“More than half [56%] of U.S. adults say they would be unable to pay their bills or meet expenses if they become disabled and could not work for a year or longer.”  Many employers offer a disability benefits program to their employees.  The disability plan is used to aid in the replacement of earnings if an employee becomes disabled.  However, a majority of employers and employees are unaware the benefit is taxable to the employee.  The disability benefit that the employee receives is a percentage of their compensation, usually 60%, and is not taxed at the time it is received, but rather at the end of the year.

Let’s run through a brief scenario of what this might look like.

John Doe earns a salary of $50,000 per year.  He becomes disabled and receives benefits from his employer sponsored disability program in the amount of $30,000 [50,000 x 60%] paid over 12 months.  Because of John’s household income he is currently in the 30% tax bracket.   He and his family are now responsible for $9,000 in taxes.  John’s net benefit is now $21,000, which is 42% of his annual salary while actively working.

You can easily see the challenges that John and his family will face.  I believe it is critical to educate both the employer and their employees about these situations, so that in the unfortunate event of a disability the employee is aware that the benefit is taxed and they are able to plan for that financial burden.

VAST can guide you in setting up a benefit that will not be reduced to 42% There are choices an employer can make while establishing or maintaining their disability benefits program that will help to reduce the financial burden their employees would face during a disability.  To learn more about disability benefit strategies or if you would like to ask us some questions please contact Tom Snow | 906.315.7236 | toms@vastsolution.com.