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28 May. 2014 | Comments (0)

I have been very concerned that long term disability will derail retirement security. Last year, in my blog, How to Improve Disability Protection in the Era of Individual Responsibility, I offered some ideas about how to address disability coverage issues and wrote about how disability can derail retirement security, particularly if the primary retirement plan is a 401(k) plan or other defined contribution plan.

New regulations from the Treasury open up opportunities to improve disability coverage and offer the equivalent of a waiver of premium provision. The final regulations provide that participants will not be taxed for disability insurance premiums paid by the plan if the following conditions are met:

1. Premiums for the disability insurance contract are paid directly from the plan;

2. The plan receives the benefit payments as required by the disability insurance contract;

3. Benefit payments under the contract are paid because of an employee’s inability to continue employment with the employer because of disability; and

4. The benefit payments to a participant’s account aren’t more than a reasonable expectation of what the participant would have received as an annual contribution during the disability period, reduced by any other contributions.

If these conditions are satisfied, the disability insurance is considered a plan investment, and the plan’s premium payments and the insurance’s benefit payments to the plan aren’t taxable to the participant.

Participants are taxed on plan benefits when they are paid from the plan without regard to whether the funding for the benefit came from contributions while a person was not disabled or the make-up of contributions during disability. 

Provisions are included for an employer to self-insure the disability coverage without adverse tax consequences.

Now is the time to revisit disability and its impact on retirement security – and it is also a good time to look at the adequacy of disability coverage in general. For example, we should examine risk found within defined contribution plans and whether this risk is adequately protected. 
While plan sponsors have spent a great deal of time focusing on investment risk and offering options to reduce such risk, many have not spent as much time thinking about these other types of risks and their impact on participants.

For further information on this issue, you can read the blog referenced above or read this May 2013 article in the Society of Actuaries Pension Section News, Don't Let Disability Derail Retirement Security, co-authored by me and David Kaleda.


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  • About the Author: Anna M. Rappaport

    Anna M. Rappaport

    Anna Rappaport is an internationally recognized expert on the impact of change on retirement systems and workforce issues. Following a 28-year career with Mercer Human Resource Consulting, Rappaport h…

    Full Bio | More from Anna M. Rappaport


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