When an employee becomes disabled, disability insurance payments are typically taxable. However, there is a little know provision that can change it from taxable to tax free. Most insurance carriers, however, do not promote it.
Here’s how it works. The “Gross Up Plan” adds a clause to the Group Disability Policy. The clause changes the premium structure for a certain class of employees, usually the executives. By recognizing their share of the premium as taxable W2 income, the benefit becomes tax free at claim time. See 104(a)(3) of the Internal Revenue Code or go to https://www.irs.gov/irb/2004-26_IRB/ar06.html.
The result to the executive is a much higher after tax disability payment for the cost of a very minimal tax. For the employer, the cost is very low, if any. We can explain how.
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