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How is group insurance taxed?

The general tax rule applied to long term disability (LTD) benefits is that if the premium is tax deductible, any benefits payable will be taxable. The employer is entitled to deduct as a business expense any group insurance premiums paid. If the employer pays any portion of the employee’s LTD premium, then any LTD benefits paid to the employees are taxable.

Because the difference between a tax-free disability benefit and a taxable disability benefit can be substantial, proper advanced planning wherever possible can mean the maximum benefit for both the employer and the employee. If it was the employer’s desire to pay for 50% of the cost of group benefits, the plan should be structured so that the employee pays the premiums associated with the group life insurance, weekly indemnity, and LTD coverage. The employer could pay the premiums for the prescription drug, dental and extended health coverage because claims on these items, since they are reimbursements, are not taxable to the employee.

Effective planning when installing the group insurance plan can have significant benefits to the employees in terms of tax savings.