After-tax premiums generally mean tax-free benefits.
When employees pay the premium with after-tax dollars, short-term disability benefits are generally not taxable to the employee. Confirm treatment with your tax advisor.
Why after-tax premiums usually mean tax-free benefits
When employees pay for short-term disability coverage with after-tax dollars, the benefits they receive are generally not taxable. Employees give up the tax saving on the premium, but keep the full benefit when they are out of work.
The rule follows the premium. Benefits are taxed in proportion to the share of the premium that was paid with pretax dollars or by the employer. An employee-paid, after-tax premium means the benefit is largely tax-free.
For an employee on a long absence the difference can be meaningful. A benefit of a given amount that is taxed arrives smaller than the same benefit that is not taxed. Some employees prefer the certainty of a benefit that matches the amount in the policy.
This choice also affects the employer. Payroll processing is simpler when benefits are not taxable, and employee communication is clearer. The premium cost to the employer does not change, because the employee is paying. We help employers structure the plan, and the tax treatment of any individual should be confirmed with a tax adviser.
What to decide and where it connects
See the Employer-Paid Option
Employer-paid premiums are treated differently.
See the Pretax Option
Pretax payment changes the result.
Read the Parent Guide
Coverage, cost and compliance for short-term disability.
Questions about this topic
Are benefits taxable if the employee pays after-tax?
Generally no. Benefits from a plan the employee paid for with after-tax dollars are generally not taxable.
Why would employees choose this?
The premium comes out of taxed pay, but a benefit received while disabled is not taxed.
Does it cost the employer more?
The employer typically pays no premium, but participation and enrollment rules still apply.
Ready? Send us your renewal, or talk it through with someone first. General information, not legal or tax advice.
Where these details come from.
IRS Publication 15-A: Taxation of sick pay and disability benefits.
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