Tax
Considerations for ERISA Disability Plans
The Employee
Retirement Income Security Act of 1974 (ERISA) is a federal statute
that regulates most employer sponsored disability, health and
pension plans. Sponsorship means the employer made the plan available
to its employees whether or not the employer funded the plan or
contributed towards the payment of plan premiums. ERISA plan benefits
may be subject to federal income tax depending on how the plan
premiums were paid, and this may have a significant effect on
the "net" benefits received especially with ERISA disability plans.
Employers
often provide benefit plans to their employees through "cafeteria"
programs which allow employees to pick and choose among various
plans, e.g. medical, dental, prescription, disability, etc. and
different levels of coverage. Employers frequently subsidize these
plans with spending accounts which employees use to cover the
cost of some or all of the plan premiums. Premium balances are
paid by the employees who are frequently given the opportunity
to pay these amounts with either "pre-tax" or "after-tax" income.
Careful consideration should be given to determining how plan
premiums are paid especially with disability plans. Generally,
disability benefits from employer subsidized plans and/or plans
paid with "pre-tax" income are regarded as taxable income while
benefits from plans paid with employees' "after-tax" income are
not subject to income tax. This can have a significant and sometimes
devastating effect on the "net" benefits employees receive should
they become disabled.
While employer
subsidized and/or "pre-tax" income paid plans may initially save
employees several dollars a month, the benefits received from
these plans may be subject to thousands of dollars in monthly
tax liability. Accordingly, employees should speak with their
benefits departments and tax advisors when determining how to
best pay disability plan premiums. Also, employees should consider
consulting with tax advisors when disability benefits are paid
since the determination of what percentage of the benefits are
subject to tax can be complex when the plan premiums were partially
employer subsidized.
