Additional Disability Insurance Taxation for Medical Executives and Entrepreneurs

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Additional Disability Insurance for Practice Owners and Physician Executives 

By Perry D’Alessio CPA

perry-dalessio-cpa

Some medical clinics, hospitals, health care employers and other business entities may offer disability insurance to their employees on a group basis as part of an employee benefit program. This is a good thing.

The expense for this coverage is typically deducted as an ordinary and necessary expense by the employer entity.

Additional DI

However, many entities also purchase additional disability insurance for the owners and executives; etc. This additional disability insurance expense should not be deducted on the entity’s tax return for two reasons.

  1. First, it would probably be considered a discriminatory benefit to the owners and, therefore, not be allowed as a deduction anyway.
  2. Second, and more importantly, when a person becomes disabled and qualifies for disability benefits whose premiums have been deducted as a business expense by the entity, the disability insurance proceeds are considered taxable income to the person receiving them.

A Catastrophe

This can be personally catastrophic since disability insurance covers only a portion (approximately 60 percent) of regular earnings. The coverage was designed to be paid on an after tax basis. The benefits would be tax free to the beneficiary and would be close to the disabled person’s net take home pay before being disabled.

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BandagesX

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Assessment

Here is one of those instances where the traditional tax planning thought process is overridden by a long term (potential) tax cost / benefit decision.

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