Frequently asked questions
Disability insurance falls under the IRS umbrella of 'third-party sick pay'. This means that disability payments have associated tax considerations. Here are some commonly asked questions about Sun Life long-term disability benefits and taxes:
Still have questions about disability benefits and taxes? Call us at 1-800-733-7879.
Answers - Benefits
How soon are benefit checks released and where are they mailed? Do checks have to be sent to the policyholder?
Benefits will be issued when (1) eligibility for coverage has been determined, (2) disability (according to the terms of the policy) has been established, and (3) the qualifying period has been satisfied. Payments are issued at the end of the benefit period. The benefit period begins the day following the end of the qualifying period and ends one month later. Each monthly benefit period then has the same beginning and end date each month. For example, if the qualifying period ended 03/05/2007, the first monthly benefit period would be from 03/06/2007 to 04/05/2007 and the first payment would be issued on or about 04/05/2007. Subsequent benefit periods would begin the sixth of each month and end the fifth of the following month and payments would be issued on or about the fifth of each month.
Payments are mailed to the policyholder, unless other arrangements are made. A policyholder may request that payments be sent directly to the claimant.
How is the benefit amount calculated?
LTD benefits are paid on a monthly basis, so we must begin by considering the claimant's eligible monthly earnings as of the benefit determination date in these same terms. Both the eligible monthly earnings and the determination date are defined by the policy.
If the claimant is an hourly employee, we will multiply the hourly rate by the actual number of hours worked per week (generally limited to a maximum of 40) to get the weekly rate. Then the process for converting a weekly rate (below) is followed.
If a weekly rate is reported, we multiply it by 52 to obtain an annual amount and then divide by 12.
If a bi-weekly rate is reported, we multiply by 26 to obtain an annual amount and then divide by 12.
If the claimant is paid semi-monthly, we multiply this amount by 2.
For salaried employees, we divide the annual salary by 12 to get the monthly rate. If the employee works less than 12 months (like most teachers), the policy may provide for a different calculation.
The Schedule Amount of insurance is calculated by applying the benefit rate to the insured's eligible monthly earnings as of the benefit determination date. After multiplying the eligible monthly earnings by the benefit rate, the product is rounded as specified by the policy, generally to the nearest dollar.
The Schedule Amount can also be a flat amount, such as $1000.00 per month. This is most often seen in voluntary plans where the employee chooses a multiple of $100.00 up to a specific maximum, expressed as a percentage of the employee's salary.
The contract will also define other income sources that are offset (deducted) from the Schedule Amount. Federal Income Tax and FICA deductions may also apply.
Are benefits retroactive after the QP is satisfied?
No, the benefit period begins the day following the end of the qualifying period and ends one month later.
How many weeks of benefits are paid for a pregnancy claim?
Up to six weeks of postpartum disability is allowed for routine pregnancies. Up to six weeks is also allowed on C-section deliveries for claimants working in sedentary occupations. An eight-week recovery period is allowed on C-section deliveries for claimants working occupations in the light to heavy range. Disability periods of lesser or greater length may be warranted by the medical and vocational factors specific to a given claim.
Please note that the qualifying period still applies, so this does not mean that six weeks of benefits will be paid. For example:
1. Normal delivery
2. Onset date of limitations = January 1 (last day of work 12/31)
3. Delivery date = January 6
4. One month qualifying period
The period of disability begins January 1st. The benefit period begins, following the qualifying period, on February 1st. Benefits would be paid from February 1st to February 16th, which is six weeks postpartum.
Will long-term disability premiums automatically be waived?
Anytime a new disability claim is set up and paid, a report is generated for the Sun Life Customer Relations Team. For policies administered by Sun Life, a Customer Relations team member will take the information from this report and waive the premiums for those new LTD claims.
For policies administered by the policyholder, premiums should continue to be paid through the qualifying period.
Do I need to file a separate claim for life waiver?
For policyholders that have both LTD and Life coverage through Sun Life, coordination of disability information occurs.
When a claim is received that has both LTD and Life coverage, our Disability Claims Professional advises the Sun Life's Life Department and copies them on important documentation.
If you are insuring the occupation, why do you need a job description?
An accurate job description provides a way for us to gain an understanding of what the sick or injured employee was doing at the point at which he/she suffered a disabling event. It is only by understanding the specifics of the person's job that we can properly identify the occupation with which his/her particular job is associated.
If the claimant has a unique occupation and there is no possibility of performing this job for another employer, we must rely on either the employer's job description or an on-site job analysis to determine the material duties of that occupation.
Understanding the job also helps us consider ways that the specific job might be accommodated to allow the person to work in spite of disability. Successful accommodations can help you keep your valued employees.
How is a recurring disability handled?
If a claimant satisfies the qualifying period, returns to active work, becomes disabled again, and has remained insured under the policy, then the same period of disability may continue.
The return to active work must be for less than six months if the later disability results from the same or related cause, or less than one day if the later disability results from a different cause.
If the return to active work is more than those periods shown above, the claimant must satisfy the qualifying period again.
How are work-related injuries handled?
Most long-term disability policies cover work-related injuries, but offset Workers' Compensation benefits. These are considered a 24 hour plan. Under a 24 hour plan, Workers' Compensation or State Disability plan benefits are directly or indirectly offset. A lump sum benefit is prorated; medical or death benefits are not taken into consideration.
Under a non-occupational long-term disability plan, no benefits are paid for an occupationally-related injury or sickness.
Answers - Taxes
Are disability benefits taxable?
If the employer has contributed 100% of the disability premiums, then the disability benefits are reported as taxable on the Form W-2. If the employee contributed 100% of the disability premiums with post-tax dollars, then disability benefits are non-taxable.
If the employee paid premiums on a post-tax basis, do I still need to report the disability benefits paid on a Form W-2 since it is non-taxable income?
Yes. According to IRS Publication 15-A, non-taxable disability benefits (referred to as third party sick pay in IRS Publication 15-A) must be reported on a Form W-2 in Box 12(a) coded as J.
Do I need to pay the employer portion of FICA?
For all long-term disability (LTD) plans it insures, Sun Life pays the employer portion of FICA during the initial FICA period. Sun Life does not automatically pay the employer portion of FICA for return-to-work FICA. However, Sun Life will, by written agreement with the policyholder, pay the employer portion of FICA for both initial and return-to-work FICA and the policyholder will reimburse Sun Life the employer portion of FICA paid by Sun Life for the return-to-work FICA period.
For most short-term disability (STD) plans, Sun Life does not pay the employer portion of FICA taxes. However, for a fee and reimbursement of taxes paid, Sun Life will pay the employer portion of FICA. A signed agreement is required for Sun Life to pay the employer portion of FICA.
Why do I need to match the FICA withheld from benefits paid to the claimant?
Internal Revenue Code (IRC) regulations consider disability benefits as wages. Sun Life withholds, from the disability benefits paid, the employee portion of FICA taxes for the first full six month period following the claimant's last day worked for the policyholder. The employer is required by law to match, as the employer portion of FICA, the amount of the employee portion of FICA withheld by Sun Life.
Why doesn't Sun Life pay the employer's portion of FICA taxes on STD benefits?
Under IRC regulations, we have the right to pass the responsibility for the employer portion of FICA taxes due on disability benefits paid back to the employer. This procedure is explained in IRS Publication 15-A. If the employer wants Sun Life to pay its portion of FICA, the employer must, by written agreement, agree to pay a fee and to reimburse Sun Life for the employer portion of the FICA paid. All such requests must be sent to the Disability Claims Support Department.
Do I still need to pay the employer portion of FICA even though the claimant is no longer our employee?
Yes, IRC regulations require the employer to continue to match the employee portion of FICA withheld from the claimant's disability benefits for the first six full months following the claimant's last day worked for the policyholder.
What is the difference between initial FICA and return-to-work FICA?
Initial FICA is withheld from disability benefits paid during the first full six months following the last day the claimant worked for the policyholder immediately prior to the period of disability. After this six month period, Return-To-Work FICA is withheld whenever a claimant has returned to work in any capacity for the policyholder, and for up to six full months after ceasing such work, where the claimant is also concurrently receiving disability benefits from Sun Life.
Why does Sun Life pay the employer portion of FICA during the Initial FICA period but not during the Return-to-Work FICA period?
Sun Life FICA Plus service under which we pay the employer portion of FICA applies only to benefits paid during the initial FICA period. Upon a claimant's return to work, we transfer the responsibility for the employer portion of FICA back to the policyholder. We do offer several options to our policyholders for handling the employer portion of FICA in return-to-work situations and notices are sent periodically to policyholders advising them of such options.
Why was no FICA withheld? Why did FICA withholding stop?
We are required to withhold FICA taxes for the first full six-month period following the last day the claimant worked for the policyholder. If Sun Life's first payment is made after the conclusion of this six-month period, FICA taxes will not be withheld. Payments made within this six-month period will be subject to FICA. Any payments made after this six-month period will not be subject to FICA, unless the claimant returns to work for the policyholder in any capacity.
IRC regulations require FICA withholding from benefit payments (no matter what period the benefits are for) issued within the first full six months following the last day worked for the policyholder. However, once this six-month period has ended, no FICA is withheld from benefits paid unless the claimant returns to work for the policyholder in any capacity.
Why did FICA withholding start again?
If the claimant has returned to work with the policyholder and is still receiving disability benefits from Sun Life, withholding of the employee portion of FICA must resume. FICA withholding will continue for as long as the claimant works for the policyholder. If the claimant then stops working for the policyholder, FICA withholding will continue for six full months after the last day worked for the policyholder.
Who will report disability benefits for the claimant?
We will prepare and forward Form W-2s for LTD benefits that we pay. If LTD benefits are paid during a return-to-work FICA period and if the policyholder requests, Sun Life will allow the policyholder to prepare and forward Form W-2s reporting the LTD benefits paid during the return-to-work FICA period.
The policyholder is responsible for preparing the Form W-2s for STD benefits paid unless the policyholder has requested, in writing, that Sun Life prepare the Form W-2s reporting STD benefits paid. There is no additional cost to the policyholder if Sun Life prepares the Form W-2s reporting STD benefits paid. The policyholder's request that Sun Life prepare the Form W-2s reporting STD benefits paid must be received prior to the end of the calendar year.
The Form W-2s prepared by us show Sun Life's name and federal EIN and are mailed directly to the claimant's home address. We do not mail copies of the Form W-2s to the policyholder.
How do I fill out a Form 941 to send with payment of the employer's portion of FICA taxes?
Sun Life will send you periodic reports reflecting the taxable benefits paid and the applicable taxes withheld.
To prepare your Form 941, include the applicable wages and taxes on lines 2, 5a, and 5c of Form 941 and after completing line 6, subtract on line 7b the employee Social Security and Medicare taxes withheld and deposited by Sun Life. Enter that amount in the Sick Pay space provided. By making the adjustment on line 7b, you will only pay the employer's portion of Social Security and Medicare taxes. You should not include any Federal income taxes withheld from third party sick pay on your Form 941 because any Federal income taxes withheld have been reported by Sun Life.
If Sun Life prepares the Form W-2, do I have anything to reconcile our Form 941?
In those instances where Sun Life prepares the Form W-2s, the policyholder must prepare a Recap Form W-2 and a Recap Form W-3 to attach to the policyholder's Form 941. These recap forms reflect the combined totals of the disability benefits paid by us and provide a means of reconciling the wages shown on Form 941. The policyholder should refer to IRS Publication 15-A for additional information on year-end reconciliation issues.
What tax reports will I receive?
Tax reports are described in Claims Reports.
Is Sun Life responsible for FUTA and SUTA taxes?
No. The policyholder is responsible for FUTA (federal unemployment taxes) and SUTA (state unemployment taxes) taxes. Sun Life will not pay FUTA and/or SUTA on disability payments. The policyholder is responsible for determining the amount of FUTA and SUTA taxes that are due on benefits paid. FUTA taxes follow the same guidelines as FICA taxes, that is, if FICA taxes were withheld, FUTA taxes are payable if the claimant has not yet met the FUTA wage limit. The policyholder must determine the wage limits that apply for FUTA and SUTA.