Employer Sponsored Disability Income It is important for a business to help employee's and owners to acquire disability income protection. The business could be crippled by the loss of an key employee to a disability. The chances of a disability before age 65 are 8 times greater than dying. The disabled employee still needs income for himself and his family. How long can a business continue to pay an any employee who becomes disabled? When would he have to be fired? Group Disability Income A business can implement a disability income benefit plan several ways. The most common method is using group disability. Short term disability is designed to provide coverage from the beginning, say on the first day of an accident, eighth day of a sickness, until the 13th week. Long term disability would pick up the coverage after that and continue until age 67, the age for full social security. Depending on the number of employees, group disability is non-contributory, meaning employer paid. (Larger employers can elect to have employees contribute to long term but participation requirements often high enough to prohibit that. It's usually better to use the same dollars to offer a minimum group long term and let the employees interested "buy up".) Group long term can insure 50% or 60% of an employee's wages. If the plan is fully paid by the employer, the cost is deductible. However, the disability benefit is subject to income taxes to the employee. The employee's net income after taxes can be as low as 30%-40% of pre-disability income.  Voluntary Buy Up Disability Income Receiving a net of 40% of pre-disability income is rarely adequate for a disabled person. All the expenses that existed prior are still there plus the additional costs incurred because of the disability. Life insurance is of no financial help because the person is not dead. Voluntary disability can insure up to 70% of income. The employee pays for the voluntary with after tax dollars, so the benefit is tax free. Giving the employees the option of increasing also helps pass some of the cost of a benefits plan to the employee. Salary Continuation Plans An employer can establish a disability income plan instead of/or in conjunction with group long term. This type of plan is usually insured with individual disability income policies. Premiums for disability income insurance paid by a corporation with the benefits payable to an employee are deductible by the corporation as a business expense, but only if a valid Salary Continuation Plan is adopted by the corporation. [I.R.C. 162(a)] A written Salary Continuation Plan does not need to cover all employees. If desired, it can be discriminatory. It can cover only employees of a given class. The plan, for example, can cover only the owner - employees, even if they are the sole shareholders and are family-related. If the employee is not taxed on the premiums paid by the corporation, the employee will be taxed on any disability proceeds received. The plan can be set up either to be taxable or non-taxable. If an employee owns and pays for disability income insurance personally, rather than the corporation, the employee cannot deduct the premiums. However, all benefits received would be entirely tax-exempt. The one exception to this deduction is to include the disability income premiums under an employee POP - Premium Only Plan. Paying the premiums on a pre-tax basis will result in the benefits being income to the employee. An employer can also bonus all or part of the premiums to an employee. If the bonus is income, then the employer can discriminate by employee or class.