In many of the agencies I visit, one of the benefits provided to employees is long-term disability coverage. The agency pays the premium for the employees, and may spend from a few dollars to several hundred dollars per month for coverage.
As employees’ compensation levels increase, so does the cost of long-term disability. Changing the waiting period or the percentage of payroll covered are two of the ways to reduce the cost, usually at the cost of the employee. But there is another way that benefits both the agency and the employee.
When the agency pays the premium for the employee, the agency gets a tax deduction for the premiums paid. However, in the event that an employee goes on LTD, the benefits are taxable to the employee.
Let’s assume an employee is making $30,000, the rate charged for the LTD coverage is .006, the LTD policy pays 70% of employee’s compensation and the tax rate is 28%. An employee going on disability will receive $21,000 ($30,000 x 70%) and Uncle Sam will take away 28% ($5,880) leaving $15,120 for the employee.
Now if the employee pays for the LTD through payroll deduction, the benefits received are tax-free, saving $5,880. I suggest the agency increase the employee’s base compensation by the cost of the LTD this year ($180). The only increased cost the agency will incur will be the payroll taxes on the $180.
The employee will incur additional taxes of $50.40 ($180 x 28%). Isn’t it worth $50.40 to save is $5,880 is the event the employee goes on LTD. That is when the employee is really going to need funds. If the employees complain about the increased taxes, the agency can consider paying some or all of the increase in taxes this year.
There is a benefit to the employer. Over the years the employee’s compensation will continue to go up which means the LTD premiums will go up. The agency will only make an adjustment in compensation once. After that, any addition premium is borne by the employees, thereby placing a ceiling on the cost to the employer.