The Dentist Who Cut Back to Three Days
Denise, 52, is sole owner and a dentist in a six-employee practice. Her individually owned disability policy, with personally paid premiums, pays $8,000 a month: 90-day elimination, own-occupation for 24 months, then any-occupation, with a residual rider paying a proportional benefit for income loss of 20% or more. In January 2023 rheumatoid arthritis forced her from five days a week to three; income fell from $22,000 a month to $13,000. She filed a claim in April 2023 and has been paid since. In January 2025 she is still at three days and still earning $13,000, and has been told the any-occupation phase now applies. The practice also carries employer-paid group long-term disability at 60% of salary with an offsets provision, plus New York statutory disability coverage for employees.
1. What actually happens to Denise's individual benefit, and when?
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First, correct the timing. Disability began January 2023; the 90-day elimination period runs to roughly April 2023, when benefits began. The 24-month own-occupation phase therefore ends around April 2025, not January 2025. She is still in own-occupation today - but the cliff is only months away, and she should plan for it now.
At the transition, the test changes from 'can she perform the material duties of dentistry' to 'can she perform the duties of any occupation for which she is reasonably fitted by education, training, and experience.' A dentist with controlled but progressive arthritis who can teach, consult, administer a practice, or do limited clinical work may well fail the any-occupation test - total disability does not require that a suitable occupation actually be offered, but part-time clinical work at 59% of prior income is strong evidence she can work.
Likely outcome: total disability ends, but the residual rider should continue to pay. Residual benefits are proportional: a 41% income loss against an $8,000 total benefit yields roughly $3,280 a month, not $8,000. She should request the carrier's own residual calculation in writing and verify the definition of 'income loss' - prior income, indexed or not, and whether practice distributions count.
2. How are the individual and group benefits taxed, and how do the offsets interact?
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Individual policy: Denise paid the premiums with after-tax dollars, so benefits are excluded from income under IRC § 104(a)(3). The full $8,000 (and any residual amount) is tax-free. Had she routed premiums through the practice and deducted them, every dollar of benefit would be taxable instead.
Group LTD: premiums paid entirely by the employer are deductible to the practice and the resulting benefits are fully taxable to her as wages. A 60% benefit that is taxable is worth materially less than the same percentage received tax-free - the comparison is after-tax dollars, not percentages.
The offsets provision is the real risk. Many group contracts reduce benefits by 'other income,' which can include Social Security disability, workers' compensation, and sometimes other group coverage - but individual policies are frequently excluded from the offset. If her group plan does offset by the individual benefit, the group benefit could fall to zero while she is on claim, and she would be paying for coverage that pays nothing. Read the definition of 'Other Income' before dropping anything.
Bottom line: keep the individual policy. It is the tax-free, non-offset layer. Also note Social Security disability benefits may be partly taxable depending on her provisional income.
3. The practice's coverage design is now in question. Advise on the group LTD and New York statutory disability benefits.
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Statutory disability (DBL): New York requires employers to provide Disability Benefits Law coverage for off-the-job, non-work-related disability - a small capped weekly benefit for up to 26 weeks. It covers employees. As sole owner, Denise is covered only if the practice elects to include her, and even then the benefit is a fraction of her income. It is a safety net, not a substitute for her individual contract. The practice must provide DBL for the six employees either through an insured plan or an approved self-insured arrangement, and should confirm it is doing so.
Group LTD design: employer-paid premiums create taxable benefits and a deduction for the practice. Converting the plan to employee-paid through a cafeteria plan makes benefits tax-free - but the employees bear the cost, participation drops, and the practice loses the deduction. For a six-person group, run the after-tax comparison before changing anything; the answer usually differs for the owner versus the staff.
Two things to act on now:
- Denise cannot buy business overhead expense or additional disability coverage once she is on claim - that window is closed. Future planning must assume her current contracts are the floor.
- Do not cancel the individual policy to save premium during the claim. It is the only benefit that is both tax-free and free of offsets.