Employer-paid disability coverage makes benefits taxable

Plain-English summary

Chief Counsel advice concluded that disability amounts received under a settlement agreement would be fully taxable if they were disability benefits paid under the taxpayer's employer's group disability insurance policy. The policy appeared to show that the employer paid all premiums, so the premiums were excludable from employees' gross income under section 106 and the disability benefits were includible under section 105(a). The advice stated that whether the settlement amounts could be excluded under section 104(a)(2) was within the jurisdiction of another office.

Ruling snapshot

• Question: How should disability settlement amounts be treated when the employer paid the premiums for group disability coverage?
• Outcome: advice given
• Key authorities: IRC §§ 104(a)(2), 105(a), and 106

Full text (IRS public release)

ID: CCA-415630-09 Number: 201011032
Release Date: 3/19/2010
Office: ------------------------
UILC: 105.00-00

From: ---------------
Sent: Wednesday, April 15, 2009 6:30 AM
To: --------------------------
Cc: --------------------------------
Subject: PDFs

I have reviewed the documents you emailed to us. If the Taxpayer claims that the amounts received under the Settlement Agreement constitute disability benefits paid pursuant to her employer’s group disability insurance policy, then those amounts are fully taxable to the Taxpayer under section 105(a).

The Policy is designated a ---------------------------------------------------------------------------------

The Policy is described as -------------------------------------

The Policy states that ---------------------------------------------------------------------------------------
--------------------------------------------------------- The “Policyholder” is identified as the Taxpayer’s employer. ---------------------------------

The Policy states ---------------------------------------------------------------------------------------------
-----------------------------

Thus, under this Policy, it appears that the Employer paid all of the premiums for its employees’ disability coverage. Therefore, the premiums are excludable from the employees’ gross income under section 106 but the disability benefits are includible in the employees’ gross income under section 105(a).

Whether the Settlement amounts may be excludable under section 104(a)(2) is within the jurisdiction of

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