Health Insurance Mastery Practice Exam

Which statement about the taxation of benefits from an employer-paid group disability plan is accurate?

1. Benefits are always tax-free

2. Benefits may be tax-deferred

3. Benefits are considered taxable income

4. Benefits are subject to a flat tax rate

The correct answer is: Benefits are considered taxable income

In the context of employer-paid group disability plans, benefits received by employees are generally considered taxable income. When an employer pays the premiums for a group disability plan, any benefits that the employee receives as a result of a claim are viewed as replacement income. As such, these benefits are subject to federal income tax since the employee did not pay for the benefits with after-tax dollars. This treatment arises because the taxation principle relies on who pays the premium. If the employee pays for the insurance with after-tax income, the benefits received would typically be tax-free; however, in the case where the employer pays the premiums, the benefits must be reported as income for tax purposes. Understanding this concept helps clarify why other options fall short in accurately representing the taxation of benefits from employer-paid group disability plans, particularly the notions of tax-deferred status or flat tax rates, which do not apply in this context.