How-To: Repayment of Long-Term Disability Benefits and Taxes

Receiving long-term disability (LTD) benefits can be a lifeline when you’re unable to work due to a disabling condition. However, there are circumstances in which you may be required to repay a portion of these benefits, especially when offset provisions or overpayments come into play.

Let’s take a closer look at the key aspects of LTD benefit repayment and the tax implications you need to consider.

Understanding Repayment of Long-Term Disability Benefits

Common reasons for repayment include overpayments, offsets due to other benefits, and lump sum settlements. Here’s a closer look at these scenarios:

Overpayments by Your LTD Insurer

Overpayments occur when your insurance company pays you more than what you’re entitled to under the terms of your policy. This situation often arises when you return to work but continue to receive full LTD benefits or if your Social Security Disability Insurance (SSDI) claim is approved after LTD payments have already been made.

• Returning to Work: If you return to work, even on a part-time basis, you must notify your insurer immediately. Failing to do so could result in receiving excess benefits that the insurance company will later demand back. Always communicate changes in your employment status to avoid unexpected repayment demands.
• SSDI Offsets: Many LTD policies require you to apply for SSDI benefits. If approved, your insurance company may reduce your LTD payments and seek repayment from your SSDI backpay. For example, if your monthly LTD benefit is $4,000 and SSDI approves you for $1,500 monthly, your LTD payment could be reduced to $2,500, and the insurer will expect repayment from the SSDI backpay amount you receive.

Offset Provisions in Your LTD Policy

Offset provisions in LTD policies allow insurers to reduce your benefits if you receive income from other sources, such as SSDI, workers’ compensation, or personal injury settlements. It’s crucial to understand these provisions to avoid unexpected repayments.

• Workers’ Compensation and Personal Injury Settlements: If you receive benefits from a workers’ compensation claim or a personal injury settlement, your LTD insurer may reduce your payments accordingly. This offset could result in a demand for repayment if the insurer has already paid you the full benefit amount.

• Other Disability Benefits: Similar to SSDI, other disability benefits, like Veterans Affairs (VA) disability payments, may also trigger an offset in your LTD benefits. Understanding the terms of your policy can help you anticipate and prepare for these adjustments.

Managing Taxes on Long-Term Disability Benefits

Taxes on long-term disability benefits can be complex, particularly if you need to repay benefits. Generally, whether your LTD benefits are taxable depends on how your premiums were paid:

• Employer-Paid Premiums: If your employer paid the premiums for your LTD insurance, your benefits are usually considered taxable income. If you must repay benefits, you may be entitled to a tax deduction or credit for the amount repaid.

• Individually-Paid Premiums: If you paid the premiums with after-tax dollars, your benefits are generally not taxable. However, the repayment may still impact your tax filings, so it’s essential to keep thorough records.

How to Avoid Repayment and Minimize Tax Implications

Dealing with the repayment of long-term disability benefits and understanding the associated tax implications can be daunting. Still, you can take steps to minimize your risk and stay in good standing with your insurer. Here are some key strategies to help you avoid repayment and manage your benefits effectively:

• Review and Understand Your Policy Terms: Carefully read your long-term disability policy, paying attention to offset provisions, repayment conditions, and any clauses related to other income sources.
• Keep Accurate Documentation: Maintain detailed records of your communications with your insurer, payments received, and any other relevant documentation. Accurate record-keeping helps you track your benefits and identify potential overpayments.
• Communicate Promptly with Your Insurer: Inform your insurer of any changes in your work status, income, or receipt of other benefits as soon as possible. This transparency helps prevent overpayments and minimizes the need for repayment.
• Consult a Legal or Financial Professional: If you’re uncertain about your obligations, consulting a disability lawyer or financial advisor can provide valuable guidance. Capitan Law can help you understand your policy, avoid common pitfalls, and protect your rights.

Get Help from an Experienced LTD Lawyer Today

Understanding the repayment of long-term disability benefits and taxes is crucial for managing your financial health while receiving LTD benefits. If you are facing repayment demands or are unsure about your policy terms, reach out to Capitan Law for personalized advice and support. Call us at (267) 419-7888 or contact us online today.