In a group Disability Income plan that pays tax-free benefits to covered employees, this plan is considered which type?

• A. Noncontributory
• B. Partially contributory
• C. Fully contributory
• D. Nonparticipating

Answer: (C)

Tax treatment of disability benefits in a group plan depends on who pays the premiums. When the benefits paid to employees come out tax-free, it usually means the premiums were paid with after-tax dollars by the employees themselves. That setup is a fully contributory arrangement, where employees pay the entire premium. If the employer paid all premiums (noncontributory), the benefits are typically taxable to the employee. If only part of the premium is paid by employees (partially contributory), the tax-free status of the benefits wouldn’t apply to the entire benefit. Nonparticipating relates to dividend participation in some policies and doesn’t determine the tax treatment of benefits. So, a group Disability Income plan that provides tax-free benefits to covered employees is best described as fully contributory.