In disability benefits from an employer-paid policy, the portion considered taxable is

• A. 75% taxable
• B. 25% taxable
• C. 50% taxable
• D. No portion is taxable

Answer: (A)

When a disability policy is paid for by the employer, the benefits are treated as wage replacement and are taxable to the employee to some extent. In typical employer-paid, noncontributory disability plans, about 75% of the disability benefit is taxable, with the remaining 25% not taxed. This reflects the idea that the portion of the benefit that corresponds to the employer’s premium cost is treated as taxable income, while a portion is considered a return of after-tax investment.

If the employee paid the premiums with after-tax dollars, the disability benefits are generally tax-free. If the employer paid the premiums with pre-tax dollars, the benefits would generally be taxed in full.