Health Insurance Info for Colorado

news & commentary on health insurance and benefits

Disability Insurance Coverage: Coming Up Short?

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Disability, whether short or long term, can happen to anyone at any time. While that’s bad enough, most people find out – usually at the most inopportune time – that their benefits aren’t nearly as generous as they believed. Not because of the terms of their group policy, however, but because of taxes!

Not too many years ago, most employers offered group long-term disability coverage, with employees purchasing short term coverage outside of the company environment, or going without. Nowadays, its more the norm for an employer to offer both short and long term coverage for all employees. Many employees think this is a great deal; the reality is that it may not be. When they become disabled, the IRS steps in and determines who paid the premium – and if the premium was paid with dollars from the employer, the employee must then report the disability benefits as wages, subject to taxes.

Depending on the different types of policies, the tax rules can vary as well. For instance, short term disability payments generated by employer premiums are subject to Social Security tax, in addition to taxation as ordinary income. Employers might be liable for this tax, as well.

Long-term disability premiums paid for by the employer will not incur Social Security taxes, due to the longer waiting period for benefits to start. However, they are subject to taxes as ordinary income by the federal government.

Most employees would prefer to receive their disability benefits on a tax-free basis, especially since it is common for expenses to go up, not down, in the event of a disability. By guaranteeing that premiums for disability coverage’s are paid with taxed dollars, employers’ preserve the benefits their employees expect.

The simplest way for an employer to do this is to set up a plan properly in the beginning, with good employee communication, and a clear understanding of the risks inherent in relying upon employer-paid disability plans. Often, employees will opt for an employee-paid plan, even if the coverage is mandatory, once the risks are explained. Employee salaries can be adjusted to compensate for the after-tax payment of disability coverage, for instance.

For executives, individual list-bill disability policies can be bonused for costs plus taxes, thereby giving the employer a tax deduction while preserving the tax-free advantage of individually-owned disability plans.

P O P (Premium Only Plan) for employees – money saver for you


“P O P” isn’t fizzy, but is does save you money. What is it? P O P stands for “Premium Only Plan”, a slimmed down version of a Section 125 plan, casually called a “cafeteria” plan or Flexible Savings Account (FSA). And it is one of the most under-utilized employee benefits around – one that any employer who has a contributory welfare benefit plan sorely needs. This concept can be an incredible way to enhance your benefits package, while simultaneously boosting your profits.

Background: Why is this known as a Section 125 plan? Because the IRS Code Section 125 is the legal authority and basis for such a  welfare benefit plan – which must meet non-discriminatory requirements, as well as other reporting requirements, especially to your employees.

Why is this concept under-utilized? Because Section 125 FSAs can be a costly to set up and operate, most employers with less than 10 employees assume that they will never make it pay for itself. especially since owners are often exempted from them. But these plans include three “modules” – premium only, flexible spending, and dependent care accounts. Since much of the cost of administration (not to mention the headache of account losses due to utilization rules that favor the unscrupulous employee) are in the flexible spending accounts, the premium only module is cheap, easy to set up, and provides immediate tax relief to both employee and employer, without the headaches or administration costs of a full blown FSA. It is the simplest type of Section 125 plan and requires little or no maintenance once it’s been set up.

Premium only plans allow employees who contribute premium dollars. out of their wages, for employer-sponsored health and welfare benefit plans the ability to withhold a portion of their salary tax-free to pay for their premium contributions. Because these benefits are viewed as tax-free under the IRS Code, an employee’s taxable income is reduced. Employers win because pre-tax benefits aren’t subject to FICA, FUTA, or work comp premiums on these wages. Simply put, every dollar through a P O P reduces an employer’s payroll, reducing the employers’ costs, which immediately drop revenue to the bottom line.

Since your employees are already paying for these expenses out of pocket, a P O P gives them a great way to save money by lowering their taxes, which increases the percentage of their take home pay. With taxes likely to rise in the future, this is a ‘gimme’ for any small business employer.

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