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14.5 Federal Tax Considerations for Business and Group Health Insurance Policies

Disability Income Insurance​

  • Premiums paid by the employer are tax-deductible as a business expense. In a contributory plan, any premiums paid by the employee are made with after-tax dollars.
  • Disability benefits received by the employee are taxable to the extent they are attributable to the employer’s share of the premium contributions.

Example: Theresa’s employer pays 75% of the premium for her long-term disability insurance. Therefore, 75% of any disability benefits she receives under the policy will be considered taxable income. Theresa is responsible for paying any applicable income taxes from her own funds.

Medical and Dental Insurance​

  • Premiums paid by an employer for group medical and dental expense coverage are tax-deductible as a business expense.
  • Self-employed individuals may deduct up to 100% of the cost of health insurance premiums for themselves and their dependents, subject to applicable limits.
  • An employee’s share of group health insurance premiums is deductible only to the extent that total premiums and unreimbursed medical expenses exceed 7.5% of the individual’s adjusted gross income (AGI).
  • Benefits received from medical and dental expense plans are generally not taxable, regardless of who pays the premiums.

Long-Term Care Insurance​

  • Premiums paid by an employer for long-term care (LTC) insurance are tax-deductible as a business expense.
  • Benefits received from a qualified long-term care (LTC) policy are generally not taxable.

Accidental Death and Dismemberment​

  • Premiums paid by the employer are tax-deductible as a business expense.
  • Benefits received are generally not subject to taxation.

Quiz​

1. How are employer-paid premiums for disability income insurance treated for tax purposes?

A. Not deductible

B. Tax-deductible as a business expense

C. Deductible only for employees

D. Taxable to the employee

Correct Answer: B

Rationale: Employer-paid premiums are considered a business expense and are tax-deductible to the employer.

2. How are disability benefits taxed when both employer and employee contribute to the premium?

A. All benefits are tax-free

B. All benefits are taxable

C. Benefits are taxable based on the employer’s share of premiums

D. Benefits are taxable only if over a certain amount

Correct Answer: C

Rationale: Disability benefits are taxable in proportion to the percentage of premiums paid by the employer.

3. If an employer pays 75% of a disability insurance premium, how much of the benefit is taxable to the employee?

A. 25%

B. 50%

C. 75%

D. 100%

Correct Answer: C

Rationale: The taxable portion of the benefit corresponds to the employer’s contribution, which in this case is 75%.

4. Which statement is TRUE regarding medical and dental insurance benefits?

A. Benefits are always taxable

B. Benefits are taxable if the employer pays the premium

C. Benefits are not taxable regardless of who pays the premium

D. Benefits are only taxable for self-employed individuals

Correct Answer: C

Rationale: Benefits from medical and dental plans are generally not considered taxable income regardless of premium payer.

5. Which statement best describes long-term care (LTC) and AD&D tax treatment?

A. Benefits from both are taxable

B. Premiums are not deductible

C. Employer-paid premiums are deductible and benefits are generally not taxable

D. Only LTC benefits are taxable

Correct Answer: C

Rationale: Employer-paid premiums for both LTC and AD&D are tax-deductible, and benefits received are generally not subject to taxation.