When selling disability insurance, you might be able to more easily close the sale and position yourself as a trusted resource if you fully understand the IRS position on federal taxation. By leveraging IRS Revenue Ruling 2004-55, which concerns the taxation of group disability benefits, you can help provide value to your customers by showing them a way to maximize the amount of benefits received by their employees.
According to a 2008 survey conducted by the Council for Disability Awareness, the recent economic downturn has not yet affected the frequency of disability claims, but carriers do expect to see a moderate increase in claims in future months. This shows that the need for disability insurance coverage has remained the same, despite changes in the market conditions.
Employees need to receive the greatest benefit amount possible at the time of disability, especially when they do not have sufficient savings in place. Employers remain concerned about the cost of insuring their benefit plans — and you can help them make the most of their premium budgets by explaining how IRS Revenue Ruling 2004-55 affects them.
What is IRS Revenue Ruling 2004-55?
IRS Revenue Ruling 2004-55 relates to the taxation of disability benefits that employees receive, which can affect the premiums paid for group disability coverage. It addresses the issue of whether certain short and long-term disability benefits that an employee receives under an employer’s plan can be excluded from the employee’s gross income. When a plan utilizes the holding in IRS Revenue Ruling 2004-55 and allows after-tax basis premium payments, employees receive benefits that are not included in gross income, and the employers continue to pay for the premiums since the plan is deemed non-contributory.
This ruling gives employees the option of irrevocably electing, prior to the plan year, to have the employer pay group disability insurance premiums on a pre-tax or after-tax basis. If they choose to have premiums paid on a pre-tax basis, the disability benefit is included in the employee’s gross income. However, if they elect to have premiums added to the employee’s W-2 on an after-tax basis, the benefits are excluded from the employee’s gross income. In this case, the employees receive benefits not included in gross income, which means more money in their pockets at the time of the disability claim payment.
How to make IRS Revenue Ruling 2004-55 work for you
IRS Revenue Ruling 2004-55 can be a great tool to use when selling group disability insurance coverage. Unfortunately, not all financial professionals know how it works and the best way to leverage it.
In the sales process, you can position this ruling to customers as a way to allow employees with a non-contributory disability insurance plan to maximize the amount of benefits received during the time of disability. You can guide them through the process using illustrations, examples, and marketing materials. Most employers are interested in finding out how their plan can be set up to maximize tax advantages.
Who to target
IRS Revenue Ruling 2004-55 can be used with employers that have a non-contributory plan and are willing to take on a minimal amount of administrative work. Plans that use IRS Revenue Ruling 2004-55 often work best when the amount of the benefits is either 50 percent or 60 percent of covered earnings. Higher benefit amounts can result in the employee having too much income replaced (since the income may not be subject to taxation), which can affect the employee’s willingness to return to work in a timely manner after a disability.
When to discuss IRS Revenue Ruling 2004-55
It is best to approach the subject at the proposal or renewal stage of the selling process. At this point, the employer is already interested in the product and is evaluating costs, benefits, and other factors.
How to get started
Before the first year that the plan is offered, employees can irrevocably elect to have the employer pay the premiums on a pre-tax or after-tax basis. After the initial election and with most plans, the taxation of the premium paid for an employee’s disability plan will not change unless the employee specifically requests it before the plan’s anniversary date. New employees can make the election when they become eligible to apply for group disability insurance coverage.
Understanding IRS Revenue Ruling 2004-55 can help you provide more options for your customers and position you as a consultant. As your customers make decisions about whether to utilize IRS Revenue Ruling 2004-55 with their group disability insurance plans, be sure to encourage them to consult with their benefit plan attorneys, tax preparers, and accountants.
While disability claims are likely to rise in the coming months and years, the true economic effect is not yet known. However, as a financial professional, understanding current IRS positions and steps that can be undertaken to benefit employers and their workforce can have a profound effect on your future sales.
Brian Case is a field vice president with American United Life Insurance Company, a OneAmerica company. He can be reached at 317-285-1797 or [email protected].