Achieve Financial Brilliance with the 2025 CFC Exam – Crack the Code to Consulting Success!

The correct answer is that the benefits associated with a disability income plan are taxable to an employee in proportion to the premium paid by the employer. This is primarily due to how the tax treatment of benefits works in relation to the payment of premiums.

In the case of disability income insurance, if the employer pays for the premiums, and the employee does not contribute to the premium costs, then any benefits received by the employee in the event of a disability are generally taxable. Conversely, if the employee pays some or all of the premiums, then the benefits to the employee would be partially or fully tax-free depending on the proportion of the premiums paid by the employee compared to those paid by the employer.

Health insurance typically allows employees to receive benefits tax-free as long as premiums are paid with after-tax dollars, which does not allow for proportional taxation based on employer contributions. Life insurance benefits are generally received tax-free by beneficiaries, regardless of whether the employer or employee pays the premiums. Retirement plans, while also having tax implications, follow different rules regarding contributions and withdrawals that do not govern the proportional taxation based on employer premium payments.

Understanding how these tax implications work allows employees to better navigate their benefits and financial planning.