Changes moving to long-term disability

[687Mooch]

I am 60, and this year underwent a significant cancer diagnosis and treatment. This month I moved from short-term to long-term disability, and was just approved for Social Security Disability, which will partially offset some of my LTD insurance pay (which is 50% of my base salary). I also will get to remain on the company's medical plan.

My questions involve what tax changes I can expect in this new status, besides a general lowering of taxable income due to a 50% salary reduction. My first LTD payment from the insurance carrier last week deducted for my medical premiums, as well as estimated federal and state withholding. However, they are not deducting for the Medicare employee portion. Is that paused while on LTD? I met my OASDI withholding limit earlier this year so I also want to know if that is paused while on SSDI. 

I expect it's likely I may remain on insurer-paid LTD, with a portion offset by SSDI through either 65 or my full retirement age of 67, so I don't want to make a mistake on tax planning. Thanks!

[MariaDG1]

Hello 687Mooch.  We're thrilled to see you here at our event today! 

• Disability insurance payments (your LTD) are only subject to FICA(OASDI) taxes for the first 6 months.  Starting in the 7th month there will not be any withholding.  If you return to work for any period of time, the 6 month clock starts again if you go back on disability.  So assuming you stay on LTD long term like you expect, you will no longer have FICA withholdings.  (Reference this IRS ruling letter)
• Assuming your LTD plan is sponsored by your employer, then your LTD benefit payments will be at least partially taxable.  The only situation when LTD benefits would not incur income tax, is if you paid the entire cost of the plan premiums yourself, and no portion was paid by your employer.  You can find more information here. 
• SSDI payments may or may not be taxable, depending upon the amount of your other income. As I don't know any other specifics about your tax/family situation, I will refer you to this excellent TurboTax article on the subject. 
• If you do remain on SSDI payments through your full retirement age, then your SSDI benefits should automatically convert to retirement benefits at the same amount.  Please reference this resource from the SSA. 

I hope that answers all your questions. Do feel free to post again if you have any further concerns. 

[687Mooch]

Thank you for the thorough answer. I have one follow-up question: Are OASDI and Medicare both under the umbrella of FICA, or are they treated separately, for the purposes of your answer? I ask because I already met my full OASDI contribution for 2023 earlier in the year, but Medicare contributions always continue through the full year in my situation. However, my LTD payments from the insurer just started, and while they are withholding for state and federal taxes for me, they are not deducting for Medicare. Will I end up in a hole for that Medicare tax unless I can get them to deduct for that as well? And then for 2024, it sounds like OASDI would restart like normal, but then both that and Medicare contribution would pause once I pass the six month mark on receiving SSDI. And only for the portion that is from SSDI, since my LTD benefit is larger than SSDI alone and will simply be reduced by the amount of SSDI. Correct? Thanks again for your help.

[MariaDG1]

I'm glad I was able to help.  Sorry if I wasn't as clear as I could have been.  FICA includes OASDI (social security) and Medicare.  The 6 month clock starts from the date you stopped working due to your disability.  So its possible both STD and LTD were paid during that time. Once you reach 6 months of disability, neither OASDI nor Medicare should be withheld.  If your LTD did not begin paying out until 6 months after your disabling event, then no FICA would be withheld. If you feel you should still be paying FICA taxes, and they are not withholding, you may want to contact the provider of your disability insurance. 

This continues until such time as you work again.  The 6 month period does not restart each year.  It would only restart if you return to work, then go back on disability.