They are wrong. You need a corrected W-2, or you can report in Turbotax that your W-2 is incorrect and fill out a substitute W-2 form. If you do nothing, the money looks like an HSA and if you aren't eligible, you will pay tax and a penalty.
See this discussion, https://ttlc.intuit.com/community/taxes/discussion/do-i-have-to-report-the-pre-tax-aflac-accident-in...
See the W-2 instructions, https://www.irs.gov/instructions/iw2w3#idm139987915368560
The ability to deduct disability insurance premiums on a pre-tax basis is part of what's called a Cafeteria plan. Cafeteria plans allow you to pick and choose from the offered benefits and pay for them pre-tax (technically, you execute a salary reduction agreement with your employer and your employer pays for the benefits.)
This is what the IRS says:
Cafeteria Plans
A cafeteria plan, including an FSA, provides participants an opportunity to receive qualified benefits on a pre-tax basis. It is a written plan that allows your employees to choose between receiving cash or taxable benefits, instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead won't make the qualified benefit taxable.
Generally, a cafeteria plan doesn't include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay.
Qualified benefits.
A cafeteria plan can include the following benefits discussed in section 2.
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Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance).
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Adoption assistance.
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Dependent care assistance.
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Group-term life insurance coverage (including costs that can't be excluded from wages).
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Health savings accounts (HSAs). Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services.
The employer or payroll company may assume that the disability premium must be reported because it is a cafeteria plan, but they are wrong. Reporting rules are very specific:
- Dependent care benefits are reported in box 10
- HSA is reported in box 12 with code W
- Group term insurance is reported in box 12 code C
- Adoption benefits in box 12 code T and in box 14
- Medical FSA -- not reported on W-2
- Disability insurance -- not reported on W-2
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