Businesses often provide their employees with group insurance coverage that provides wage replacement benefits for loss of income due to sickness, accident, maternity or disability. The employer may pay the full amount of the premiums for the insurance plan or there may be an arrangement by which the employer and employee share the cost of the premiums. In some instances, the employee may pay the entire premium. Generally, wage loss replacement insurance is disability insurance. For tax purposes, your employees may find the following information helpful.

Premiums Paid by the Employer

If the company pays the premiums, the premiums are not considered taxable benefits in the hands of the employee. Should the employee claim benefits because of say, a long-term illness, the amounts received are considered employment income for tax purposes and taxed in the hands of the employee.

Premiums Paid by the Employer and Employee

If the premiums are paid for by both the employer and the employee, the taxable amount of any benefits received from the plan can be reduced by the amount of the premiums that the employee has paid for the coverage. This includes premiums the employee has paid in previous years while a member of the employer's plan. If your company provides this type of plan, consider providing employees with a summary of the premiums paid on their behalf each year. An accompanying letter could explain the importance of maintaining this record should the employee need to claim compensation for loss of income.

Premiums Paid by the Employee

If the employee is responsible for all of the premiums and pays them with after-tax dollars, any benefits received under the plan are tax-free. Note that for an employee-pay-all plan to exist for tax purposes, the employee must be contractually obligated to pay all premiums under the plan.

Provisions and Tax Implications

It is important that employees understand the specific provisions of the plan and the required documentation should a claim arise. Owner/managers should also ensure that employees understand the tax implications of the premiums paid and any benefits that may be received.