AD Banker Comprehensive Practice Exam

What type of income benefits received by an employee are subject to taxation in proportion to the premium paid by the employer?

1. Medical

2. Long-Term Care

3. Disability

4. Dental

The correct answer is: Disability

Disability benefits received by an employee are subject to taxation based on the premium paid by the employer. The Internal Revenue Service (IRS) stipulates that if an employer pays the full premium for a disability insurance policy, any benefits received by the employee as a result of that policy will typically be taxable income. If the employee pays the premiums on the policy with after-tax dollars, the received benefits are generally not subject to income tax. This framework helps ensure that the tax treatment of benefits matches the contributions made. In contrast, the tax treatment for medical, long-term care, and dental benefits varies and does not follow the same proportionality rule regarding employer premiums and taxable income. Understanding this distinction is important for both employees and employers for financial planning and tax implications.