In a disability policy with employer-paid premiums (employer pays 75%, employee pays 25%), which portion of the benefits is subject to income taxes?

• A. Taxes must be paid on 25% of the benefits received
• B. Taxes must be paid on 75% of the benefits received
• C. No taxes on disability benefits
• D. Taxes must be paid on all benefits received

Answer: (B)

Taxability of disability benefits depends on who paid the premiums. When the employer pays a portion of the premium, the portion of the disability benefit that corresponds to those employer-paid premiums is taxable as income to you, while the portion funded by your own after-tax dollars stays tax-free.

In this situation, the employer covers 75% of the premium and you cover 25%. Therefore, 75% of any disability benefits would be taxable, and 25% would be tax-free. This reflects the rule that benefits mirror how the premium was financed: employer-paid portions are taxed, employee-paid portions are not.