Group Disability Insurance

Question 1

Short Term Disability

Answer 1

STD coverage provides income replacement beyond the period of time allowed for sick-pay benefits;

Question 2

Sick-pay plans

Answer 2

Benefit is received as compensation subject to all the payroll withholding and tax requirements, including FICA and FUTA. The missed workday has no impact on the employee’s paycheck.

Question 3

When does an employee becomes eligible for STD benefits

Answer 3

after a waiting or elimination period of one week of being totally disabled (i.e., unable to perform the normal responsibilities of their position [“own” occupation]) due to sickness.

Question 4

Long-Term Disability

Answer 4

After 24 months, the total disability required for eligibility is defined as the inability to perform any occupation for which the disabled worker’s education, training, or experience might have prepared them for.

Question 5

What is the taxation of Group Disability Benefit, when the employer pays group disability premiums

Answer 5

Employer deducts premiums as business expenses if the premiums qualify as additional reasonable compensation and if the benefits are payable to the employee or the employee’s beneficiary (the premium is not deductible if the benefits are payable to the employer);

The benefits are includible in the employee’s taxable income, the tax credit for disability retirement income may be available, and if the employee contributed to the plan, the corresponding portion of the benefits is excludible from income

Question 6

Tax consequences for disability insurance (rule)

Answer 6

you either get a deduction or have the proceeds be nontaxable, never both.

If you cannot (or do not) deduct the premium, then the benefit is nontaxable (excludible). If you deduct the premium, then the benefit is taxable (includible)

Question 7

Nondiscrimination Requirements

Answer 7

See page 259

Question 8

All of the following statements regarding a group disability policy are correct EXCEPT

A. group disability plans often provide long-term disability only.
B. benefits are often less in group policies, which accounts for the lower cost.
C. a group disability policy is less expensive than an individual policy because the risk is spread over more participants.
D. group plans often state the benefit amount as a percentage of the employee’s compensation, while individual plans pay a specific dollar amount.

Answer 8

A

Group disability plans often provide two different types of coverage based on the benefit period: short-term disability (STD) and long-term disability (LTD)

Question 9

Under the workers’ compensation laws, an insured worker and/or his dependents are entitled to which of the following classes of payable benefits?

I. Medical expenses
II. Temporary disability expenses
III. Permanent disability expenses
IV. Survivors’ death benefits

A. I, II, III, and IV
B. I only
C. I and II
D. III and IV

Answer 9

A

Question 10

Amare is an employee of ABC Company, where he earns a salary of $100,000. The company provides Amare with disability income insurance that will replace 60% of his income upon disability. ABC Company pays the premiums on the policy. Assuming Amare is in the 24% income tax bracket, and ignoring Social Security disability benefits, how much will he receive each month on an after-tax basis from the policy, assuming he meets the definition of disability?

A. $1,200
B. $1,400
C. $3,800
D. $5,000

Answer 10

C

The answer is $3,800. Because the employer paid the premiums, the disability benefit received by Amare will be taxable at the ordinary income tax rates.

Annual disability benefit =
$100,000* .60(60%) = $60,000

Monthly benefit $6000/12 = $5,000
After-tax rate (1–24%) = 0.76
Monthly after-tax benefit $3,800

Question 11

Your client is covered under his employer’s long-term disability insurance plan. Benefits under this coverage are usually:

A. equal to 50%–65% of base pay plus projected commissions and bonuses.
B. provided during the first 12–24 months when the insured is unable to perform “any occupation.”
C. equal to 50%–70% of base pay.
D. payable to age 65, at which time graded benefits may be paid until age 80.

Answer 11

C

For the first 12–24 months, the definition of disability is own occupation. Benefits are generally payable to age 65, with graded benefits often being paid until age 70.

Question 12

Which of the following statements regarding group disability income plans are CORRECT?

I. Short-term group disability provides coverage for up to six months.
II. A group disability income plan is sometimes broader than an individual plan and is usually less expensive.
III. Long-term group disability plans provide coverage for a specified term longer than two years, until an employee’s normal retirement age (usually age 65), or until death, if sooner.

A. II and III
B. I and III
C. I, II, and III
D. II only

Answer 12

A

Short-term disability income plans provide coverage for up to 52 weeks..

Question 13

The elimination period in a group disability income policy may be thought of as

A. a dollar amount deductible.
B. a time copayment.
C. a dollar amount copayment.
D. a time deductible.

Answer 13

D

The elimination period is the time period before the benefits will pay after a disability occurs.

Question 14

Which of the following federal income tax treatment of the payments is CORRECT?

A. Employer payments for group long-term care policies are tax deductible for ABC but taxable income to the employees.
B. Employer payments for group long-term care policies are not tax deductible for ABC but are taxable income to the employees on the basis of the policy coverage table.
C. Employer payments for group long-term care policies are tax deductible for ABC and nontaxable income to the employee.
D. Employer payments for group long-term care policies are not tax deductible for ABC and nontaxable income to the employees.

Answer 14

C

Question 15

CDE, Inc., has recently started paying for the long-term care policies for its 45 employees. How are the payments treated for federal income tax purposes if the policies are qualified policies?

A. Employer payments for group premiums are tax deductible to the employer and not taxable income to the employee.
B. Employer payments for group premiums are tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
C. Employer payments for the group premiums are not tax deductible to the employer and not taxable income to the employee.
D. Employer payments for the group premiums are not tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.

Answer 15

A

Employer payments for the group insurance premiums are tax deductible to the employer and not taxable income to the employee.

Question 16

If Bonita, age 52, pays for her group disability income with pretax dollars, how would the benefit payments she receives be taxed?

A. They would not be subject to income tax.
B. They would be subject to a 10% penalty because Bonita is under age 59½.
C. They would be subject to income tax.
D. They would be tax deductible.

Answer 16

C

If disability premiums are paid with pretax dollars, any benefits received would be subject to income tax, and the employer would be required to match the FICA portion of payroll taxes.

Question 17

Randall’s employer pays the entire premium for his group disability coverage. If Randall became disabled, how much of his benefits from this coverage would be subject to tax?

A. 0%
B. Depends on his tax bracket
C. 50%
D. 100%

Answer 17

D

Randall’s company can deduct the premiums, all of Randall’s benefits are taxable.

Question 18

Robin is self-employed and the sole shareholder of an S corporation. She pays herself a salary of $96,000 and has a disability income insurance policy that will pay her 50% of her gross salary. Her corporation pays the entire amount of the policy premium. If Robin is in a combined 30% state and federal marginal income tax bracket, how much, if any, is her net-of-tax monthly disability benefit?

A. $0
B. $2,800
C. $1,200
D. $4,000

Answer 18

D

Robin is a shareholder of more than 2% of an S corporation, for whom the corporation paid the disability policy premium. Therefore, the S corporation must add the cost of the policy premium to Robin’s W-2, making the entire monthly benefit amount of $4,000 ($96,000 × 0.50 ÷ 12) tax free. If Robin had not been self-employed (e.g., her employer was a C corporation), then the answer would have been $2,800, or, $4,000 × (1 – 0.30).

Question 19

Which of the following statements regarding group disability income plans is CORRECT?

I. A group disability policy is less expensive than an individual policy because the risk is spread over more participants.
II. Group plans often state the benefit amount as a percentage of the employee’s compensation, while individual plans pay a specific dollar amount.

A) II only
B) Both I and II
C) Neither I nor II
D) I only

Answer 19

B

Question 20

All of the following statements about short-term disability are true except

A. short-term disability coverage usually is provided through an insurance company plan
Incorrect Answer
B. short-term disability policies have long elimination periods.
Correct Answer
C. short-term disability benefit amounts are generally one-half to two-thirds of the employee’s compensation.
Incorrect Answer
D. short-term disability benefits are normally for 13-52 weeks

Answer 20

B

Short-term disability policies have short elimination periods—sometimes just a few days or even no elimination period at all. The benefit period is normally 13-52 weeks months. Benefit amounts are generally one-half to two-thirds of the employee’s compensation.