TL, DR: If you are enrolled in group long-term disability insurance through your job, make sure you are paying your premiums with post-tax dollars.
In today’s constantly evolving and increasingly competitive workplace, employers often offer benefits as part of a total compensation package to lure potential employees and retain their current staff. Sometimes these benefits are employer-paid, meaning the employee receives them free; there can be benefits to the employer, such as tax incentives, not to mention the impact on employee morale! Other times these benefits are employee-paid, meaning the employee receives access to the benefit which s/he otherwise would not have had through the employer. Hybrid arrangements also exist, in which both employer and employee contribute, such as matching programs.
It is important for every employee to know what benefits s/he is receiving, and whether the benefits are being funded from his / her own salary or by the employer. It is also important for every employee to know whether the benefits are being funded with pre-tax or post-tax dollars. This is especially crucial for group disability premiums.
When you’re dealing with group disability, tax is only paid ONCE: either you pay the premium with post-tax dollars, or you are taxed on the benefit, should you need to collect a benefit.
Frankly this breaks my brain a bit! Let’s say you’re paying $9 monthly for your group long-term disability coverage. It is unlikely that you will even notice that $9 coming from the post-tax side as opposed to the pre-tax side. But if you need to file a disability claim, however, and your group policy is like 99% of the ones I’ve ever dealt with and pays around 60% of your salary, if you pay your premiums with post-tax dollars, you’ll receive 60% of your salary TAX FREE. If you pay your premiums with pre-tax dollars, you’ll still need to pay tax on the benefit – which means 60% of your salary will then have regular income tax taken out, and your total take home pay will be even less than 60% of what it was pre-disability. In the cases of the clients I’ve worked with, this is literally the difference of hundreds of thousands of dollars in benefits!
A simple call or email to your HR department coupled with a review of your last few pay stubs should make this possible.
I could write volumes about the necessity of disability insurance. I spent a large portion of my professional life at a boutique law firm solely handling disability law. I’ve seen the havoc disabilities of all types can wreak on even the most seemingly financially stable families and businesses, and the incredible lifesaving benefits of a proper insurance program. If you’re interested in learning more about individual disability insurance or disability insurance for your business, please reach out.