Will I have to pay income tax on my ERISA long-term disability settlement?

paying income tax on ERISA lump sum settlementsYou had a long-term disability insurance policy through your employer, but when you were injured and needed the benefit, your claim was denied. You sued under the Employee Retirement Income Security Act (ERISA) and won. You agreed to a lump-sum settlement amount and hoped that was the end.

However, be aware that you probably owe federal income tax on the settlement for the year you received it. Why is this? We look here.

Some Lump-Sum Settlements Are Taxable

The U.S. Tax Code is about as easy to decipher as the Rosetta Stone. Tax laws regarding disability settlements are no exception.

Generally, if the long-term disability (LTD) policy was provided by the employer as a fringe benefit, the payments you receive—or the lump-sum settlement in an ERISA lawsuit—would be taxed as income. This rule applies even if your disabling injuries are purely physical, despite the tax law that says disability payments for physical injuries are not taxed. That rule only applies to self-funded long-term disability policies.

Several U.S. Tax Court rulings over the last several years have upheld that ERISA lump-sum settlements are subject to federal income tax.

How to Avoid Losing Settlement Funds to Taxes

While there’s no way to get around federal tax laws, you may ease the pain by choosing monthly payments of your long-term disability benefits instead of a lump-sum settlement. When you work with an ERISA attorney to appeal your long-term disability denial, tax implications will be considered along with your right to the benefits you deserve.

Monast Law Office Welcomes ERISA Long-Term Disability Appeals

If your employer-sponsored group LTD claim was denied, I can help you sort through your options for filing an appeal that preserves the settlement. As a workers’ compensation attorney with over 30 years of experience, I know what it takes to build a strong disability claim, and I understand how the ERISA process works. Time isn't on your side with a denied LTD claim. Contact the Monast Law Office today and get off to the right start with your appeal.
 

 

James Monast
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