Which statement about disability benefits is true when comparing employer-provided benefits to a personal disability policy?

Which statement about disability benefits is true when comparing employer-provided benefits to a personal disability policy?

• A. Benefits from the employer are not taxable; benefits from the personal disability policy are taxable.
• B. Both benefits are taxable.
• C. Both benefits are not taxable.
• D. Benefits from the employer are taxable; benefits from the personal disability policy are not.

Answer: (D)

The tax treatment of disability benefits hinges on how the premiums were paid. When an employer pays for a group disability plan, those premiums are usually funded with pre‑tax dollars, so the benefits you receive are taxable as ordinary income. On the other hand, a personal disability policy is typically paid for with after‑tax dollars, so the benefits you receive are generally tax‑free. Therefore, the statement that employer benefits are taxable while personal-policy benefits are not taxable is the correct one.

The tax treatment of disability benefits hinges on how the premiums were paid. When an employer pays for a group disability plan, those premiums are usually funded with pre‑tax dollars, so the benefits you receive are taxable as ordinary income. On the other hand, a personal disability policy is typically paid for with after‑tax dollars, so the benefits you receive are generally tax‑free. Therefore, the statement that employer benefits are taxable while personal-policy benefits are not taxable is the correct one.