Maryland Life and Health Insurance License Practice Exam

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

1. Exempt from taxable income

2. Fully taxable income

3. Partially taxable income

4. Taxed upfront at payroll

The correct answer is: Fully taxable income

Disability income benefits from a group policy provided by an employer are fully taxable income to the employee if the employer pays the premiums for the coverage. This treatment arises because the benefits are considered a form of compensation for the employee. Since the employer deducts the premium payments as a business expense, the tax code requires that benefits received are treated as taxable income. When an employee receives disability benefits under these circumstances, these payments are taxable in the same way that a salary would be. Conversely, if an employee pays the premiums with after-tax dollars, the benefits received would generally be tax-free when claimed. This distinction is crucial in understanding the tax implications on disability income benefits.