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CGCPA
CGCPA, CPA
Category: Tax
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Experience:  over 40 years experience in tax matters
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As an employer I am considering offering Long Term Disability

Resolved Question:

As an employer I am considering offering Long Term Disability to a few of my key employees. What are the tax implications of this for both the employer and the employee? The premiums will be fully paid by the company. Am I required to report this on the W2?
Submitted: 5 years ago.
Category: Tax
Expert:  CGCPA replied 5 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

If the company provides long term disability only to key employees (employer paid) the benefits will be subject to income, Social Security and Medicare taxes as a taxable fringe benefit but the employer will be able to claim a tax deduction for the cost.

Here is a short piece from the IRS concerning key personnel:

Plans that favor highly compensated
employees.
If your plan favors highly compensated employees as to
eligibility to participate, contributions, or benefits, you must include in
their wages the value of taxable benefits they could have selected. A plan you
maintain under a collective bargaining agreement does not favor highly
compensated employees.



A highly compensated employee for this purpose is any of the following
employees.



  1. An officer.


  2. A shareholder who owns more than 5% of the voting power or value of all
    classes of the employer's stock.


  3. An employee who is highly compensated based on the facts and
    circumstances.


  4. A spouse or dependent of a person described in (1), (2), or
    (3).


Plans that favor key employees. If
your plan favors key employees, you must include in their wages the value of
taxable benefits they could have selected. A plan favors key employees if more
than 25% of the total of the nontaxable benefits you provide for all employees
under the plan go to key employees. However, a plan you maintain under a
collective bargaining agreement does not favor key employees.

A key employee during 2011 is generally an employee who is either of
the following.



  1. An officer having annual pay of more than $160,000.


  2. An employee who for 2011 is either of the following.





    1. A 5% owner of your business.


    2. A 1% owner of your business whose annual pay was more than
      $150,000.

 

 

Therefore it will require inclusion in the W-2 forms of those receiving the benefit.

 

 

Customer: replied 5 years ago.
How would it be included on the W2?
Expert:  CGCPA replied 5 years ago.
It would be included in the income lines (wages, social security wages, Medicare wages, state income) and the social security and Medicare taxes would need to be withheld. If you offer this same plan to all employees at a nominal cost to all of them the benefit would not be taxable. (Just thought you should know this bit of information to help in decision making).
Customer: replied 5 years ago.
One last question...is the amount of the premiums what is included as part of the wages?
Expert:  CGCPA replied 5 years ago.
Yes it is.
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