A group Disability Income plan that pays tax-free benefits to covered employees is considered:

• A. Fully contributory
• B. Noncontributory
• C. Partially contributory
• D. Tax-exempt

Answer: (A)

The tax treatment of disability benefits in a group plan depends on who pays the premiums and whether those premiums are paid with after-tax dollars. When the plan is fully contributory, the employee pays the entire premium with after-tax dollars. Because the employee has paid those premiums with after-tax money, the benefits received from the disability coverage are generally tax-free. That’s why this option fits: it describes a setup where the employee’s after-tax premium payments lead to tax-free benefits.

If the plan were noncontributory, the employer would pay the full premium, typically with pre-tax dollars, and the disability benefits would usually be taxable to the employee when received. In a partially contributory plan, only the portion funded by the employee after tax would be tax-free; the employer-paid portion would be taxable. The label tax-exempt isn’t appropriate here because disability benefits aren’t automatically tax-exempt; their tax status depends on the premium payment source.