Lecture 9Group Disability Income Coverage• Taxation

• Importance of Disability Coverage

• Sick Leave Plans

• Insured Disability Income Plans– Short Term– Long Term

• Other issues

Taxation• Employer paid premiums are tax deductible• Employee paid premiums are not tax deductible• Benefits from a fully contributory plan are tax free• Benefits from a noncontributory plan are taxable• Benefits from a partially contributory plan are taxable in the

proportion of employer premiums to total premiums• Social security taxes are payable on taxable disability

benefits for last month employee worked plus next six calendar months

Tax Credit• Must be permanently and totally disabled• Maximum credit

– $750 (single person)– $1125 (married filing jointly)– $562.50 (married filing separately)

• Credit limited to disability benefit received• Credit reduced by 7.5% for Adjusted Gross Income (including

disability income) over– $7500 (single person)– $10,000 (married filing jointly)– $5000 (married filing separately)

• Credit also reduced 15% for any tax free income received as pension, annuity or disability benefit from government programs, including Social Security

Tax Credit ExamplesSingle person receiving $1000/month disability benefit for all of 1999 from a noncontributory plan

Case 1: No other income

Tax credit = 750 - .075x(12,000-7,500)

= $412.50

Case 2: Employee also gets $500/month Social Security for the last six months of 1999

Tax credit is reduced another .15x(6x500) = 450

Result is the tax credit is eliminated

Importance of Disability Coverage• Frequency of disability

– 3 in 10 employees will incur a disability lasting 90 days or longer during working years

– 1 in 10 employees will incur a permanent disability prior to age 65

• Severity (in financial terms)– More costly than death

• Lost income• Medical expenses• Need for continuing care

• Disability coverage– Approximately 3/4 of employees have short term coverage– Only about 1/3 of employees have long term coverage (in

addition to social security)

Sick Leave(Salary Continuation Plans)

• Replace lost income for limited period

• No waiting period

• Benefit schedules

• Treatment of unused sick leave

• Abuse of sick leave

Insured Disability Income Plans

• Short Term vs. Long Term– Distinction– Definition of disability– Benefits– Length of benefit period– Waiting period– Coordination of benefits

• Social Security• Workers’ Compensation• Other insurance• Pension plan

Other Issues

• Rehabilitation

• Continuation of other benefits