Disability pretax/post workaround

[GasMe]

I know the merits of using postax dollars for disability premiums but what do people think about this situation. My practice can reimburse its physician employees for individual long-term disability insurance premiums, thus making them pretax. It is my understanding, although maybe not clearly written into IRS code, that if one were to become disabled the IRS would use the tax basis of premiums paid in the year the disability occurred to determine taxability of benefits.

So what if I waited until Dec 31 and if I did not become disabled, then choose to be reimbursed, thus making this premiums pretax. This would then reset the following year. If I became disabled, I would of paid that current year's premiums with post-tax dollars, thus making benefits non-taxable.

What do you all think?

[TheGipper]

I've often wondered the same. Sadly, our group disallows submitting disability insurance premiums to the reimbursement plan.

[jfoxcpacfp]

GasMe wrote:

I know the merits of using postax dollars for disability premiums but what do people think about this situation. My practice can reimburse its physician employees for individual long-term disability insurance premiums, thus making them pretax. It is my understanding, although maybe not clearly written into IRS code, that if one were to become disabled the IRS would use the tax basis of premiums paid in the year the disability occurred to determine taxability of benefits.

So what if I waited until Dec 31 and if I did not become disabled, then choose to be reimbursed, thus making this premiums pretax. This would then reset the following year. If I became disabled, I would of paid that current year’s premiums with post-tax dollars, thus making benefits non-taxable.

What do you all think?

Click to expand...

That's not how it works. If you have been paying for the policy with pre-tax dollars and become disabled, all benefits are taxable. If you have been paying for the policy with after-tax dollars, none of the benefits are taxable.

Life Insurance and Disability Proceeds

[TheGipper]

I think OP is referring to submitting his disability premiums to his group reimbursement plan which would in essence make them tax free.

[Scott at MD Financial Services]

It is called a disability reimbursement plan, talk to your tax attorney and they can draw up the document assuming you have a C-corp.  Follow the rules very closely as a small mistake and your claim dollars are taxable.

[TheGipper]

For sake of argument (and leaving out ethical judgements), why would OP's approach not work?

Every year monthly disability premiums paid with post-tax dollars.

Every late December, OP submits expenses to his group business and medical reimbursement plans which includes his disability premium payments (assuming no disability claim).

If OP ever gets disabled and makes claim, he simply doesn't submit premiums in December at the end of the year. Would this work or is it negated by prior years' tax free premium payments? Does one need a separate "disability reimbursement plan"?

[Scott at MD Financial Services]

One can certainly do anything they want to attempt.  However after seeing a ton of these things go right and some go wrong, my simple recommendation is to engage a professional, get it done right, get it documented correctly this way you know you are in good shape.  Yes it may cost a few bucks to get a professional to do it but it will be done correctly with no discrimination issues, documentation issues and withhold scrutiny in an audit either pre or post claim.  Not everything is a DIY project.

[GasMe]

This is not an issue of "gaming" the system at all. I am simply trying to understand the IRS' regulations and if a legitimate "loophole" is revealed, then I am sure many would appreciate and change their handling of disablity premiums.

There are private letter rulings that clearly substantiate what I outlined above. However, PLRs only apply to the taxpayer who presented the question so the safest route might be to try to obtain one's own PLR.