South Carolina Insurance Practice Exam

How are disability income benefits from a group policy paid for by an employer treated for tax purposes?

1. Tax-free income

2. Taxable income

3. Tax-deductible expenses

4. Exempt from taxation

The correct answer is: Taxable income

Disability income benefits from a group policy paid for by an employer are considered taxable income for the employee if the employer pays the premiums and does not include them in the employee’s taxable income. This means that employees receiving benefits through such a policy will have to report this income on their tax returns, as it is subject to federal income taxes. The rationale behind this treatment is that since the employer pays the premiums, the benefits are viewed as compensation, similar to wages, and therefore taxable. If the employee were to pay the premiums using after-tax dollars, the benefits they received would typically be tax-free. However, in this scenario, since the employer is covering the cost and not offering the premiums as part of the employee’s taxable income, it results in the benefits being treated as taxable income. This distinction is important for understanding how different arrangements can affect the tax implications of disability benefits.