Employers will be able to provide employees their much-needed benefits which would have been otherwise unaffordable with a Section 125 Cafeteria Plan. The benefits offered under such a plan are deducted pre-tax so the cost of the premiums are significantly less than what these employees could be forking over had they availed of insurance coverage using after-tax income.

Disability benefits are among the benefits that can be offered under a Section 125 Cafeteria Plan. Disability insurance essentially provides for an employee's daily living expenses if he or she falls ill or gets injured, rendering him or her unfit to work.

But one thing that the employee needs to be aware of is that disability coverage paid for under a Cafeteria Plan can reduces the benefits he gets. The reason for this is that the premiums were paid by the employee pre-tax so the amount that went into paying for the disability insurance were not taxed at all. So, if benefits are paid, the IRS wants its revenue on the back end, and those disability benefits become taxable to the employee. With a substantial portion of your benefits taken out for taxes, this would leave a paltry amount for support during your recovery period.

But had you secured a disability insurance policy out of your own pocket, or even acquired one through your employer but with the contribution made using after-tax income, the benefits paid out to you would have been absolutely free of tax.

So, how does the taxation work?If you as the employee receives the benefit amount directly from the insurer, the amount given to you could already be net of withholding and FICA taxes, plus Medicare. The amount of the benefit payments will then be added to your taxable wages on your Form W-2, or you may get a separate Form W-2 just for the insurance benefits. If it's an option to have taxes taken out of the payments as they occur, you should probably do it ? you don't want to have to pay the total amount of the taxes next April 15. If the benefits are all paid out because the employee is unaware that they are taxable, he will be in for a big headache when the W-2 or 1099 forms are given out on January the following year.

Of course, the benefits won't be taxed at 100%, and it's certainly better to have taxable disability benefits than to have no safety net at all should you become hurt. The important thing is you still have some amount to tide you over.

If getting disability insurance through a cafeteria plan is the only affordable option open to you at the moment, then just do it. But if at all possible, try to get your disability policy – or an extra disability policy – on your own, outside of the Section 125 Cafeteria plan.

Best of all, just hope you never need it. And since the tax advantages are only one of the considerations in a Section 125 Plan, both employers and employees should seek advice from a professional when considering the benefits to be included in a cafeteria plan.

Visit us at http://taxfreepremiums.com to know more about the benefits you can avail and the resulting tax savings a Section 125 Plan offers. You can also learn more about our automatic document solution that can give timely and cost-effective updates to your Section 125 POP plan document.