The common practice is that when payment is made on a pre-tax basis for any benefit, that benefit becomes taxable to the employee. Benefits that were purchased with after-tax dollars are not taxable to the employee or beneficiary since the premiums have already been taxed.
If the employer-paid benefits are treated as pre-taxed benefits, the benefit becomes taxable to the employee. Hypothetically, if an employer provides a base LTD benefit to employees and the employee is allowed to purchase a supplemental benefit on an after-tax basis, the employer portion of the LTD benefit paid to the employee will become taxable but the supplemental portion purchased by the employee will not become taxable. However, if the LTD premium is paid on a pre-tax basis, the benefit (which is payable to the employee) will become taxable.
It is important to note that there is an exception to this rule; if the employer-paid life insurance, where up to $50,000 is allowed to be provided by the employer. Any amounts more than $50,000 are taxed as imputed income to the employee; because of this the benefit is not taxable to the beneficiary.