If an employee contributes 50% toward the disability plan premium, what portion of a $1,000 monthly disability benefit is taxable income?

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Multiple Choice

If an employee contributes 50% toward the disability plan premium, what portion of a $1,000 monthly disability benefit is taxable income?

Explanation:
The key idea is how disability benefits are taxed based on how the premiums are paid. If part of the premium is paid with after‑tax dollars by the employee, the portion of the disability benefit that corresponds to that after‑tax portion is not taxable. The rest of the benefit, which is funded with pre‑tax dollars (often by the employer), is taxable. In this scenario, the employee contributes 50% of the premium with after‑tax dollars. That 50% of the premium translates into 50% of the monthly benefit being non‑taxable. The other 50% of the benefit is taxable because it reflects the pre‑tax portion of the premium. So, of a $1,000 monthly disability benefit, $500 is tax-free and $500 is taxable. Therefore, the amount that is taxable income is $500.

The key idea is how disability benefits are taxed based on how the premiums are paid. If part of the premium is paid with after‑tax dollars by the employee, the portion of the disability benefit that corresponds to that after‑tax portion is not taxable. The rest of the benefit, which is funded with pre‑tax dollars (often by the employer), is taxable.

In this scenario, the employee contributes 50% of the premium with after‑tax dollars. That 50% of the premium translates into 50% of the monthly benefit being non‑taxable. The other 50% of the benefit is taxable because it reflects the pre‑tax portion of the premium.

So, of a $1,000 monthly disability benefit, $500 is tax-free and $500 is taxable. Therefore, the amount that is taxable income is $500.

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