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NEW REVENUE RULING ADDRESSES EMPLOYER-PAID DISABILITY

June 09, 2004

The IRS today published Rev. Rul. 2004-55 on how proceeds of employer-paid disability insurance are taxed. The ruling's conclusions are what you might expect:

-If the employee receives the insurance benefit tax-free, the benefits are taxable, but

-If the employee has elected to be taxed on the employer's premium payments, the proceeds are tax free.

The ruling covers long-term and short-term plans.

Key text:

   HOLDING
   Under the Amended Plan, long-term disability
   benefits received by an employee who has 
   irrevocably elected, prior to the beginning of 
   the plan year, to have the coverage paid by
   the Employer on an after-tax basis for the 
   plan year in which the employee becomes 
   disabled are attributable solely to after-tax 
   employee contributions and are excludable
   from the employee's gross income under 
   Sec. 104(a)(3).

   Under the Amended Plan, long-term disability
   benefits received by an employee whose 
   coverage is paid by the Employer on a 
   pre-tax basis for the plan year in which 
   the employee becomes disabled are 
   attributable solely to pre-tax Employer 
   contributions and are includible in the 
   employee's gross income under 
   Sec. 105(a).

UPDATE: Reader "Chad" makes an important point in the comment below.

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