Taxation of Benefits: How Does It Work?
The taxation of employee benefits is something that is often a topic of conversation with prospects and clients who have never offered a group benefits plan before. Many of them are surprised to find out that most benefits are tax-free compensation to employees. With that being said, taxation of benefits can vary based on the type of product being offer. We’ll walk you through the different categories of benefits and whether or not they are taxable.
Overview of Tax-Free & Taxable Benefits:
Health & Dental Premiums:
Usually the highest cost line item in any group benefits plan are health and dental premiums. These are tax-free for your employees.
Long Term Disability (LTD) Claims:
In respect to LTD claims, the income when on a claim is taxable if premiums were paid by employer. However, if the premiums are paid by the employee than the disability income on the claim is tax-free. There are pros and cons to both so make sure to ask your benefits specialist to go through those with you in more detail to know what the best route is.
Life & Living Benefits:
When it comes to life insurance, accidental death and dismemberment, and critical illness insurance, premiums paid on employees’ behalf are a taxable benefit. But unlike LTD, it’s important to note that the insurance proceeds paid at time of claim are always tax-free.
Understanding the taxation of benefits doesn’t need to be a challenge. With the right advisor, even a more confusing topic like taxation of employee benefits can become a relatively simple conversation. It all starts with you asking the important questions.