Long-term disability benefits provide financial support to individuals who can no longer earn income from their job, or any job, due to a medical disability. There are different types of long-term disability policies out there with different terms and arrangements. One of the main differences you see are personal long-term disability policies and group long-term disability policies. Long-term disability policies through an individual’s work are almost always group policies. Under these policies, the source of funding for the insurance premiums can vary, with employers and employees adopting different payment structures.
What are Employer-Paid Premiums?
When the insurance premiums for long-term disability policies are paid by an Employer, it is considered an employee benefit, meaning that the employer assumes the financial responsibility for providing this coverage to all their employees who qualify. Employer-paid premiums are often part of a comprehensive benefits package offered to attract and retain employees which often offers multiple types of insurance coverage.
One of the significant advantages of employer-paid premiums is that the cost is typically tax-deductible for the employer. Also, since these premiums are paid on a group basis, the rates tend to be lower compared to individual policies. This can make long-term disability coverage more affordable and accessible to employees who may not be able to secure affordable individual long-term disability coverage on their own. These policies also offer coverage for individuals who may be denied due to pre-existing health conditions.
What are Employee-Paid Premiums?
In contrast to employer-paid premiums, employee-paid premiums require the individual to assume the cost of insurance premiums for their long-term disability coverage. Employees may have the option to purchase coverage through their employer’s group plan or seek their own individual policies. In some cases, employers offer voluntary long-term disability insurance as part of their benefits package, allowing employees to choose whether or not they want to participate on the understanding that the employee will need to pay the associated insurance premiums.
One key advantage of employee-paid premiums is the portability of coverage. Since the employee is the policyholder, they can typically take the policy with them if they switch jobs or leave the company for employment elsewhere. This can be important, particularly for individuals with pre-existing health conditions who may find it challenging to obtain new coverage on the individual market.
Importantly, employee-paid premiums are often paid with after-tax dollars, which means that any potential long-term disability benefits received in the future will be tax-free. This can be advantageous when compared to employer-paid premiums, where benefits are typically subject to income tax.
Does It Really Matter Who Pays the Premiums?
The distinction between employer-paid and employee-paid premiums for long-term disability benefits can be an important factor when it comes to denied long-term disability claims. If you have to start a lawsuit to enforce your rights to denied long-term disability insurance, many cases are settled via negotiation or mediation for a lump sum amount to account for your long-term disability payment arrears, as well as your future long-term disability benefits payments, adjusted to take into account the present day value. If your long-term disability insurance premiums were paid by your employer, then any lump sum payment would be taxable, and the amount you would receive could be significantly less than you would receive if the employee had paid the insurance premium.
If you have been denied your long-term disability benefits and have a question about the tax implications, contact the lawyers at Taylor & Blair LLP today.