Question 59

Disability benefits in a noncontributory plan may incur federal income tax.

In a noncontributory plan, disability benefits are the type of group health insurance for which it is most likely that some federal income tax may need to be paid.

A) Medical expense

Medical expense benefits under a noncontributory plan are typically not subject to federal income tax. This is because the benefits paid to cover medical expenses are generally considered a reimbursement for out-of-pocket costs rather than taxable income.

B) Dismemberment

Dismemberment benefits are also usually not subject to federal income tax. These benefits are regarded as compensation for a loss rather than income, so they do not trigger tax obligations under federal law.

C) Accidental death

Accidental death benefits are typically paid as a lump sum to beneficiaries and are not subject to federal income tax. The payments are considered a form of life insurance payout, which is generally tax-exempt.

D) Disability

Disability benefits in a noncontributory plan are the most likely to incur federal income tax because they can be considered income replacement. If the employer pays the premiums without any employee contribution, the benefits received may be taxable as income.

Conclusion

Disability benefits stand out as the correct answer since they may be taxable in a noncontributory plan, depending on how the premiums are paid. In contrast, medical expense, dismemberment, and accidental death benefits are usually tax-exempt. Understanding the tax implications of these benefits is crucial for policyholders and beneficiaries alike.