Hello,
The company I work for has a base LTD plan which covers 60% of your base salary. The premium is 100% paid for by the company, is not included in my income, and any benefits I receive are fully taxable. The base plan is considered non-contributory.
Optionally they offer a buy-up for an additional 6 2/3% of base salary. I've had this for several years and pay 100% of it with after-tax dollars. The benefits I receive are not supposed to be taxable.
Here is my issue. Last year I received benefits from the plan. I cannot determine from research whether this arrangement is considered contributory or non-contributory. This affects the taxation of the buy-up since, if it is considered contributory, the 3-year look-back rule applies and a portion of that buy-up benefit will end up taxable. Cigna administers our plan and I cannot get anyone to explain to me why the taxable amount is so high.
Kind Regards,
A.

“Here is my issue. Last year I received benefits from the plan. I cannot determine from research whether this arrangement is considered contributory or non-contributory. This affects the taxation of the buy-up since, if it is considered contributory, the 3-year look-back rule applies and a portion of that buy-up benefit will end up taxable.”---->I guess so. As long as you paid for the LTD premiums out of your own pocket and did not deduct them in any way, then all proceeds, lump sum or otherwise, are tax-free. Though, LTD insurance is available through the ER, it is expensive to purchase as an individual. LTD insurance is usually provided by ERs, and there are a variety of differing plans available for ERs to offer as part of a comprehensive EE benefits package. If your ER paid the premiums or you deducted them on your tax return, then they are taxable as ordinary income. So, it depends; if you’ve paid for your long-term disability policy with pretax dollars, your LTD benefits will be subject to taxation. Most people have LTD insurance coverage as part of a benefit package offered by their ER.. Even if you pay part of the LTD insurance premium and your ER pays the rest, your LTD benefits will be taxable.If you paid for your long-term disability benefits with after-tax dollars, your long-term disability benefits will not be subject to taxation.
“Cigna administers our plan and I cannot get anyone to explain to me why the taxable amount is so high.”----> Long-term disability benefits can count as earned income depending on the source of payment. Private insurance payments are generally considered earned income because they are paid in lieu of wages. There are two appropriate forms. Form W-2 should be used if the disabled person has not yet reached the retirement age limit set forth by the ER. If the person receiving disability benefits has reached or exceeded the retirement age limit, the 1099-R is needed.Distribution Code 3 on a 1099-R indicates a Disability Retirement. If the funds you received are from a normal retirement plan that are being paid out early due to disability, then those funds are totally subject to tax, regardless of what is entered in box 2a.If instead of being disability retirement funds, these were payments being made for LTD, with the intention that at some point you would return to work, then the benefits might possibly be not taxable. But if this is strictly early retirement benefits that you receive due to disability and now being retired, the entire amount is subject to tax. If you bought the LTD insurance through financial planner or an agent , you need to contact the planer / agent for information in detail. Only they know of your LTD.

To make certain I understand you correctly, let me throw out a simple hypothetical.
Assume EE has not reached retirement age, earns $8000/mo and ER provides a base LTD plan of 60%, premiums fully paid by ER and not included in EE's imputed income. EE becomes disabled and receives benefit pmts of $4800/mo.
Assume also that ER offered an LTD buy-up option for an addt'l 6 2/3%, premiums fully paid by EE with after-tax dollars. If EE accepted the buy-up, EE would receive an addt'l benefit pmt of approx. $533.28/mo.
So - If EE is disabled for 1 mo, EE's W2 should include only the $4800 as taxable income and none of the $533.28?
On its face it could be the situation you mention in your reply, "...Even if you pay part of the LTD insurance premium and your ER pays the rest, your LTD benefits will be taxable..." But is this the case, or is it two separate items: a base plan covered 100% by ER and a buy-up option covered 100% by EE?

“Assume also that ER offered an LTD buy-up option for an addt'l 6 2/3%, premiums fully paid by EE with after-tax dollars. If EE accepted the buy-up, EE would receive an addt'l benefit pmt of approx. $533.28/mo.So - If EE is disabled for 1 mo, EE's W2 should include only the $4800 as taxable income and none of the $533.28?”----> At some point you would return to work, then the benefits might possibly be not taxable. I guess you need some professional help from a financial planner/ agent(administrator) for LTD.
“On its face it could be the situation you mention in your reply, "...Even if you pay part of the LTD insurance premium and your ER pays the rest, your LTD benefits will be taxable..." But is this the case, or is it two separate items: a base plan covered 100% by ER and a buy-up option covered 100% by EE?”---->Not two separate items(but for shared cost plan). There are a few choices on who can pay for a LTD plan. Years ago, many companies paid the full amount for LTD. Now the trend has costs shifting away from this method. Depending on which option is chosen, there may be different costs and tax implications: ER fully paid plan; EE fully paid plan ;shared cost plan.LTD benefits, as sick pay, are to be included in the gross income of EEs if the ER pays part or all of the premium for the coverage. In these situations, the disability benefits received by the EE are subject to federal taxation. If the ER pays the entire insurance premium, then the benefits received are 100 percent taxable to the EE;if the ER pays a portion of the premium and the EE pays the balance with post-tax dollars, then the benefits are taxable in the same proportion as the percentage of the premium paid by the ER;if the ERpays a portion of the premium and the EE pays the balance with pre-tax dollars through a Section 125 Cafeteria Plan, then the benefits received are 100 percent taxable to the EE;if the ER pays nothing and the EEpays the entire premium with post-tax dollars, then the benefits received are not taxable;if the ER pays nothing and the EE pays the entire premium with pre-tax dollars, then the benefits received are 100 percent taxable to the EE.