An employer pays 100% of the premium for an employee's group long-term disability insurance and does not include the premium in the employee's wages. If the employee later becomes disabled and receives monthly benefits, how are those benefits taxed?

Explanation

Under IRC §105(a), when the employer pays the disability premium tax-free to the employee, the benefits the employee later receives are fully includible in gross income. The employee-pay rule under §104(a)(3) (tax-free benefits) only applies when the employee funds the premium with after-tax dollars.