In a group disability income plan, benefits paid to employees are typically taxed as

• A. Tax-free benefits
• B. Taxable to employees
• C. Partially taxable
• D. Tax-deductible to employer

Answer: (A)

In a group disability plan, how benefits are taxed to the employee mainly depends on who paid the premiums and how they were paid. When the plan is employer-paid (a common group setup, often noncontributory with no employee premium), the benefits that the employee receives are typically tax-free. That’s because the employee did not contribute pre-tax dollars toward the premium, so the payout isn't considered taxable income to the employee. If the plan were contributory or funded with pre-tax employee dollars, the benefits would usually be taxable to the employee. The option about the employer deducting the premium pertains to the employer’s taxes, not the employee’s treatment of the benefits.