Can employer-paid long term disability premiums be excluded from taxable income? Code section needed

8 This is a good question that confuses many tax professionals too! The distinction between long term disability (LTD) insurance and long term care (LTC) insurance is important. You're right that Section 106 primarily addresses employer-provided health insurance and long term care coverage. For long term disability insurance specifically, we need to look at Section 106(a) in conjunction with Section 105. The treatment of employer-paid LTD premiums depends on how benefits would be paid out if you became disabled. If your employer pays the premiums AND the potential disability benefits would be taxable to you when received, then the premium itself is not included in your income now. However, if your employer pays the premiums BUT you would receive the benefits tax-free if disabled, then the premiums are taxable to you now as compensation. Many employers structure their disability plans where they pay the premiums (and include that value as taxable compensation to employees now) so that if you become disabled, your benefits would be tax-free when received.

12 After dealing with this exact issue last year, I discovered taxr.ai (https://taxr.ai) and it was a game-changer for sorting through complex tax code questions like this. I uploaded the relevant sections of my employer's benefits handbook and my tax documents, and their AI analyzed everything and provided a clear explanation of how my specific disability insurance premiums should be treated for tax purposes. What impressed me was that it didn't just give a generic answer but actually cited the specific tax code sections and relevant revenue rulings that applied to my situation. Saved me hours of digging through confusing IRS publications.

19 I wanted to follow up about my experience with taxr.ai after asking about it earlier. I decided to give it a try with my disability insurance tax question, and it was honestly incredibly helpful. The system immediately identified the relevant code sections (including some Revenue Rulings I never would have found on my own) and explained exactly how my employer's premium payments should be treated. What really helped was getting a clear explanation of how my specific plan documentation affected the taxability. Turns out I had been reporting things incorrectly for the last two tax years! I'm going to use their documentation to support my position if I need to file amended returns.

14 After spending HOURS trying to get through to the IRS about this exact disability premium tax question last year, I finally used Claimyr (https://claimyr.com) and it saved my sanity. Their service got me connected to an actual IRS agent in about 15 minutes when I had been trying for days on my own. The agent was able to walk me through the specific tax treatment for my employer's disability plan and confirmed which form codes should be used on my W-2. If you need definitive answers from the IRS directly, you should check out their demo video: https://youtu.be/_kiP6q8DX5c. I was skeptical it would actually work, but it absolutely did.

22 Alright, I need to eat my words about Claimyr. After posting my skeptical comment, I was still stuck with my disability premium tax questions and getting nowhere. I reluctantly tried the service, and I'm completely shocked to report that I got through to an IRS representative in about 20 minutes. The agent confirmed exactly what I needed to know about employer-paid disability premiums and Section 105/106 interaction. They even emailed me some documentation afterward to support their explanation. I've never gotten that level of service from the IRS before. So for anyone reading this thread with similar tax questions - if you need definitive answers straight from the IRS, this service actually does work. I'm still surprised.

7 Something that hasn't been mentioned yet - there's also Rev. Rul. 2004-55 that specifically addresses situations where employees can choose to have disability insurance premiums included in gross income. This "opt-in" taxation of premiums is common in many employer plans to ensure benefits would be tax-free if needed later.

5 Does anyone know if this is different for state taxes? My state's department of revenue seems to have different rules than the federal government for some benefits.

This is such a helpful thread! I'm dealing with a similar situation where my employer offers both short-term and long-term disability coverage, and I've been confused about the tax implications. From what I'm reading here, it sounds like the key is understanding whether my employer is paying the premiums and including them as taxable income to me, or if they're paying them as a non-taxable benefit (which would make any future benefits taxable). I need to dig into my benefits documents to see exactly how our plan is structured. Does anyone know if HR departments are typically knowledgeable about these tax distinctions, or should I be prepared to do my own research? I don't want to get incorrect information that could cause problems down the line. The mention of Rev. Rul. 2004-55 is particularly interesting - I'll need to look that up to see if our company offers that opt-in election during open enrollment.

This has been an incredibly informative discussion! As someone who's been struggling with understanding disability insurance taxation, I really appreciate all the detailed explanations. I want to add one more resource that might be helpful - IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits) has a section specifically on accident and health benefits that covers disability insurance premiums. It's not the easiest read, but it does provide the official guidance on when these premiums are excludable from income versus when they need to be included. For anyone still confused about their specific situation, I'd recommend gathering three key documents: your Summary Plan Description (SPD) for the disability coverage, a recent paystub showing how (or if) disability premiums are handled, and your most recent W-2 to see if any disability premiums were included in your taxable wages. The tax treatment really does come down to that fundamental principle mentioned earlier - the IRS won't tax you twice. Either you pay tax on the small premium amount now, or you'll pay tax on the potentially larger benefit payments if you ever need them. Understanding which scenario applies to your situation is crucial for proper tax planning.

I've been following this thread closely as I'm in a similar situation with employer-paid disability premiums. One thing I wanted to add that might help others - if you're still unsure about your specific situation after reviewing your plan documents, you can also request a written clarification from your benefits administrator or payroll department. I did this last year when I couldn't determine from my paystub whether the premiums were being treated as taxable income. I sent a simple email asking: "Are the disability insurance premiums paid by the company included in my taxable wages, and if so, in what amount?" They responded with the exact dollar amounts and confirmed the tax treatment. This documentation became really valuable when I was preparing my taxes, and it also helped me understand that I had the option to change my election during the next open enrollment period. Sometimes the most direct approach - just asking your employer's benefits team - can save a lot of confusion and research time. The key is asking for the information in writing so you have it for your tax records, rather than relying on a verbal explanation that you might misremember later.

As a newcomer to this discussion, I'm really grateful for all the detailed explanations here! I'm dealing with a similar situation where I just started a new job that offers disability insurance, and I had no idea there were different tax treatments depending on how the premiums are structured. One question I have after reading through all these responses - if my employer gives me the choice between having them pay the premiums (making future benefits taxable) versus having the premiums deducted from my after-tax pay (making future benefits tax-free), how do I decide which option is better? Is there a rule of thumb for evaluating whether it's better to pay tax on the smaller premium amount now versus potentially paying tax on larger benefit payments later if I ever become disabled? I imagine it depends on factors like my current tax bracket, expected future tax rates, and the likelihood of actually needing the benefits, but I'm not sure how to weigh all of that. This thread has already taught me so much about disability insurance taxation that I never knew before!