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Many employers provide disability benefits to their employees as part of a comprehensive employee benefits package. Disability benefits replace a percentage of pre-disability income if an employee is unable to work due to illness or injury for a specified period of time. Employers may offer short-term disability coverage, long-term disability coverage, or integrate both short- and long-term disability coverage.
Group disability benefits can be structured in a number of ways. The taxability of these benefits generally depends on how the premiums for the coverage are paid. For example, if an employer and its employees split the cost of premiums for disability coverage, and the employees’ premiums are paid on a pre-tax basis through a cafeteria plan, the disability benefits are fully taxable to employees.
This Compliance Overview answers common questions regarding the taxability of disability benefits.
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