Something New To Talk About In Group DI
Being able to bring your clients new ideas in disability, let alone new ideas about adding value to their group disability plan, has been a bit difficult of late.
Over the last decade, most discussion about group disability has been how wrapping individual products around the group can maximize the after-tax benefit.
The most popular (and most successful) value-adding concept was to simply do the math for the boss, explain how a 60% to $10,000 per month benefit really means an after-tax benefit of $6,000 per month, or only 38% of income and to place an individual disability policy to cover the difference.
Many clients dont even think about the tax effect of a 100% employer-pay plan.
The taxation of disability benefits seems to draw a lot of questions, but it is really very basic. The rule I always have used in explaining the impact of taxes on disability benefits is, “Uncle Sam always gets his money.” He either gets it from someone paying tax on the money used to pay the premium, or he gets it from the person collecting the benefit. If an employer pays the premium, then the benefit will be taxed.
If the employer pays the employee and the employee pays the disability premium, then the benefits are tax-free (since the employee already has paid tax on the income that he or she used to pay the premium).
The Uncle Sam rule is one of the primary dilemmas of group disability. For employers to gain the best rates on group disability, they have to purchase a 100% employer-paid plan. Plans with voluntary enrollment have a higher degree of adverse selection and thus are priced higher. But 100% employer-paid plans, while being less expensive, mean that employees are going to have to pay the tax on the benefit. True, the individual buy-up concept is very effective for highly paid employees; however, it is not the best solution for every company or employee.
Now, however, thanks to the Internal Revenue Service, there is now a solution for your 100% employer-pay clients.
In June 2004, the IRS released Revenue Ruling 2004-55. This allows employees to make an irrevocable annual election to pay the tax on the employer-paid premium in order to qualify for a tax-free benefit. This election must be made prior to the new plan year or can be made by a new employee at time of enrollment into the plan.
For all the fans that prefer selling buy-up disability insurance, dont worry. Portability, long-term cost and other factors still make the buy-up idea a great one for many companies.
But for the average Joe who simply wants the security of an inexpensive and guaranteed disability benefit, the IRS ruling has the answer. Knowing exactly what benefit you have coming and not worrying about taxation is very good for peace of mind. That is definitely something new to talk about.
is vice president-voluntary group and executive benefits for Cottingham & Butler in Dubuque, Iowa, and founder and president of the Disability Income Advisor and Consumer Association. His e-mail address is firstname.lastname@example.org.
Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.