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To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The tax treatment is the same as the nature of the underlying claim.
Thus - if the settlement is to replace the long term disability benefits - we need to verify if these long term disability were taxable or not - and the same treatment will be applied to your settlement.
In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer.
If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer.
A long term care insurance contract is an insurance contract that only provides coverage for qualified long term care services. The contract must:
Be guaranteed renewable,
Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits, and
In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.
In most cases, long term care insurance contracts are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) are excludable in most cases from income as amounts received for personal injury or sickness.
See for reference IRS publication 525 page 18
So if based on the above - you have a long term insurance contract - benefits are not taxable, but if you retired on disability, you must include in income any disability pension because contributions were paid by your employer.
To have a more precised determination - your plan documents must be analysed.