Is Short-Term Disability Taxable Income?

The IRS determines whether short-term disability benefits are taxed.

Individuals purchase short-term disability, STD, plans through their employers or privately from insurance companies to replace their incomes when they are not able to work for temporary periods of time. These plans pay out when workers are hurt or become sick from medical conditions covered by their policies. Depending on the types of policies purchased, STD benefit payments will be taxed by the Internal Revenue Service, IRS.

Definition

Short-term disability plans cover individuals for periods of time ranging from several months up to one year. STD plans are one of two types of disability coverages available in the United States along with long-term disability, LTD. Benefit payments from STD plans typically covers 60 percent of the insureds' salaries. Payments will never cover 100 percent of their earnings as a way to motivate individuals to get back to work.

Premium Amounts

Insurers consider several factors about the applicants for individual plans such as their ages, occupations, coverage amounts, medical histories and salaries. Premiums for group-sponsored STD plans are based on the size of the groups and the collective information about its members such as their ages, genders and work occupations. Insurance premiums are higher for applicants who work in industries that are physically demanding, such as home building.

Taxable Benefits

Short-term disability payment are taxed by the IRS if the insurance premiums are paid with before-tax dollars. Sponsors of group disability plans typically pay insurance premiums with funds that haven't been taxed yet. Privately-owned STD plans, which are bought individually through insurance companies, generally pay out non-taxable benefits because premiums are paid with after-tax dollars.

Disadvantages of STD Plans

STD plans have waiting periods that you must satisfy before receiving benefit payments. These periods last from several weeks to months, depending on the insurers. Also, only 50 percent of employers sponsor group disability plans for their workers, according to Insurance.com. Individuals who have to apply for private STD plans can be denied coverages if insurers determine they are high risks. On the other hand, group plans must accept each applicant regardless of their medical conditions.

References

• Insure: The Basics of Short-Term Disability Insurance
• SmartMoney: Do You Need Disability Insurance
• Disability Benefits 101: Short-Term Disability
• HCV Advocate: Taxing Disability Benefits