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Regulation and Compliance > Federal Regulation > IRS

IRS Formalizes Disability Benefits Tax Guidance

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NU Online News Service, June 11, 2004, 5:15 p.m. EDT — Workers can exclude group disability benefits from taxable income if they paid income taxes on the disability insurance premium contributions.[@@]

The Internal Revenue Service comes to that conclusion in Revenue Ruling 2004-55.

IRS officials already have given similar interpretations in private letter rulings. But a revenue ruling, which also expresses IRS views about a tax issue, tends to carry more weight than private letter rulings in court proceedings and in other settings, according to an analysis of IRS terminology by Stewart, Archibald & Barney L.L.P., Las Vegas, an accounting firm.

Barbara Pie, the IRS tax-exempt entity specialist who wrote the new revenue ruling, considers the case of an employer who starts out paying workers’ disability insurance premiums himself, without including the premiums in employees’ taxable income, then amends the plan to require employees to pay the premiums themselves on an after-tax basis.

Section 104(a)(3) of the Internal Revenue Code lets employees exclude most health and accident insurance reimbursement payments from taxable income, and Section 1.104-1(d) lets employees who buy health or accident insurance with their own money exclude benefit payments, Pie writes in the revenue ruling.

But Pie notes that Section 105(a) requires employees to pay taxes on amounts received as a result of employer-paid contributions for accident or sickness insurance that were not included in taxable income.

If employers pay part of the cost of disability insurance, then employees must pay income taxes on a portion of the benefit payments, Pie writes.

Pie also writes that employers can offer employees a choice of paying taxes on employer disability insurance contributions or excluding the contributions from their taxable income.

If an employer changes the plan to include disability insurance contributions in employees’ taxable income, then the amended plan is a new plan, and the IRS will treat the amended plan as an employee-paid plan, not as a plan partly or completely funded by the employer, Pie writes.

“The applicable statutes and regulations do not distinguish between short-term and long-term disability plans,” Pie adds.

An employee could, for example, let her employer pay for long-term disability insurance but pay for short-term disability insurance with her own taxable income. In that case, the employee would have to pay income taxes on any long-term disability benefits payments, but she could exclude the short-term disability benefits from her taxable income, according to Pie’s analysis.

The IRS has posted a copy of Revenue Ruling 2004-55 at //


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