Which plan pays tax-free benefits to employees?

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

Answer: (A)

In employer-sponsored plans, who pays the premium drives how benefits are taxed. If the plan is fully contributory, the employee contributes toward the premium, typically with after-tax dollars. Because those dollars have already been taxed, the benefits paid out by the plan to the employee—in many cases for disability or sickness coverage—are received tax-free. That’s why this type of plan is described as paying tax-free benefits to employees.

If the employer pays the entire premium (noncontributory), the tax treatment of benefits can differ and may be taxable to the employee when benefits are received. Partially contributory mixes the two and creates a partial tax impact based on how much of the premium the employee paid.

Tax-exempt isn’t a separate plan type used to describe how benefits are paid in this context, so it’s not the correct framing for this question.