Is Short Term Disability Taxable in California?
Workers in California who are applying for short-term disability (STD) insurance may have to pay taxes on their benefit payments depending on how the plans are paid for. STD plans are bought to provide a source of income for individuals if they are unable to work due to covered medical conditions. Disability coverages in the Golden State can be obtained privately from insurers or through the state disability program.
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Types of STD Plans
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Generally, STD plans cover workers for temporary periods of time ranging from several weeks to two years. Insureds may have to satisfy waiting periods before receiving benefits. Waiting periods, which can last up to two weeks, start at the onset of disabilities and end when benefits are scheduled to begin. Disability plans are bought individually, or coverages are obtained through group plans sponsored by professional association and employers. California is one of five states (Hawaii, New York, New Jersey and Rhode Island are the others) that provide short-term disability coverages for its residents. Funded by payroll taxes, California pays workers benefits that can last a year.
Taxation of STD Benefits
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STD plan benefits in California are subject to taxation if premiums are paid with money that hasn't been taxed by the IRS. This is the case with employer-sponsored group coverages where pretax dollars generally fund these types of plans. Individually owned plans that are bought directly from insurance companies are usually paid for with after-tax dollars. Therefore, insureds under these plans will receive benefits that are not considered taxable compensation. Benefits from the California disability program are not taxable as well.
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Benefit Amounts
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Benefit payments from STD plans replace a percentage of the workers' predisability incomes. The amounts vary from insurer to insurer, however. According to the website DisabilityBenefits101, most STD plans pay between 40 and 70 percent of the insureds' earnings. The California disability program replaces 55 percent. Insurers may also change benefit amounts after certain periods of time. For example, insureds may receive benefits that account for 60 percent of their salaries for a couple weeks, and then the amounts drop to about 50 percent. However no STD plans will replace 100 percent of the workers' earnings. This is to motivate workers to return to their jobs as quickly as possible.
What's Not Covered
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STD plans cover many illnesses and injuries that cause insureds to miss work for temporary periods of time. However, STD plans do not pay benefits to insureds whose medical conditions were caused by war, suicide attempts or during criminal activities. These plans also don't cover job-related illnesses and injuries. Medical problems caused at work are covered by workers' compensation insurance.
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