When are Disability Benefits Taxable?

The IRS issued Revenue ruling 2004-55 on June 9, 2004 stating that, long-term disability benefits received by an employee who has irrevocably elected, prior to the beginning of the plan year, to have the coverage paid by the Employer on an after-tax basis for the plan year in which the employee becomes disabled are attributable solely to after-tax employee contributions and are excludable from the employees gross income under §104(a)(3).

Long-term disability benefits received by an employee whose coverage is paid by the Employer on a pre-tax basis for the plan year in which the employee becomes disabled are attributable solely to pre-tax Employer contributions and are includible in the employees gross income under §105(a).

These holdings are equally applicable to short-term disability benefits.

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