by John Darer® CLU ChFC MSSC CeFT RSP CLTC
A possible financial disaster looms for the uninformed, as disability Insurers 
are offering buyouts of employer paid long term disability insurance claims payments and some are not doing a good job of explaining the ramifications to claimants already determined to be permanently disabled.
Consider the following:
- Payments to the disabled from 100% Employer paid LTD are 100% taxable*.
- A lump sum buyout of 100% employer paid LTD is 100% taxable and taxable in the tax year of payment of the lump sum.
- When continuing to receive 100% employer paid LTD claim payments as scheduled, applicable tax occurs in the year payments are made.
- The lump sum buyout could be less than 50% of the total payout.
- The lump sum buyout could negatively impact areas of means tested public assistance.
There is virtually no circumstance if you are totally disabled, where selling your employer paid long term disability claim payments makes financial sense.
What is the IRC 104(a)(3) Tax Exemption for Disability Payments?
The IRC 104(a)(3) Tax Exemption for Disability Payments only applies to "amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer)".
Last updated January 1, 2025