unusual disability taxability query

[testin]

unusual LTD disability taxability query

What is the name of your state (only U.S. law)? California

I've been on LTD a number of years. Benefits were managed for my former employer by an absence management company (I'll call it BenCO, not it's real name). Checks bearing my former employer's logo were sent to me by BenCO.

About six months into my disability, when I noticed that BenCO had stopped withholding state tax, I contacted them and asked them to start doing so again (because I did not want a large tax bill on April 15), at which point they told me that once six calendar months have elapsed since an employee last worked, CA stops taxing the employee's LTD benefits, although the IRS continues to tax them.

I've been relying on that.

But then ... My old employer was bought, and with that came a new LTD management company, not located in California, which being unaware of what BenCO had asserted, started withholding CA state tax, and started placing the phrase "3rd party sick pay" in boxes 13 and 14 of my W2.

So far, I have just filed an extension for 2011.

I am worried about the effects of the change. I don't want to pay taxes that I'm not supposed to, but I can't find anything that I am sure supports BenCO's position (I can no longer contact them since the changeover). During my searching online, I could not find a California tax code section that says anything either way.

Secondarily, I'm concerned about the "3rd Party sick pay" entries in boxes 13 and 14, as several California publications say that "3rd Party sick pay" is "also known as STD" and that ''Sick pay which is made after the first six calendar months following the last calendar month in which the employee performed services for the employer is not considered "3rd Party sick pay". So, by calling it 3rd party sick pay, they are effectively asserting that I have not reached the six month point.

I did find, in the CALIFORNIA UNEMPLOYMENT INSURANCE CODE, section 933, which reads:

"Wages" does not include any payment on account of sickness or accident disability, or medical or hospitalization expenses in connection with sickness or accident disability made by an employer to, or on behalf of, an employee after the expiration of six calendar months following the last calendar month in which the employee worked for such employer.

And section 939 of that code which reads:

Types of payments excluded from the definition of wages by Sections 931, 931.5, 933, 934, 935, 936, 937, 938, 938.1, 938.3, and 938.7 shall be excluded from the definition of wages only during the time that the respective type or types of payments set forth in those sections are similarly excluded from the definition of wages contained in the Federal Unemployment Tax Act.

Those definitions are in the Federal Unemployment Tax Act "Sec. 3306. Definitions", part (b)(4):

(b) Wages

For purposes of this chapter, the term ''wages'' means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include -

(4) Any payment on account of sickness or accident disability, or medical or hospitalization expenses in connection with sickness or accident disability, made by an employer to, or on behalf of, an employee after the expiration of 6 calendar months following the last calendar month in which the employee worked for such employer;

It would seem that Sec 3306 (b)(4) would satisfy the requirements of section 939 and therefore section 933 of the California Unemployment Insurance Code, carrying the implication that disability payments made by an employer or a 3rd party representing the employer after "the expiration of six calendar months" do not fall under the definition of "wages".

Could this be the basis for BenCO's assertion? Have I just found a red herring? Is there a better reason to be found somewhere in the CA tax law?

I could not find this issue dealt with in the CA tax code, but it is discussed in the CA Unemployment Insurance Code, which makes assertions about sick pay / disability pay specifically from an employer and not from any government agency, (whether state or federal, unemployment related, or otherwise).

Is it strange for the Unemployment Insurance code to be discussing the details of when employer (or agent of employer) provided sick pay is not taxable, but for the Tax code not to be discussing those details in any place that is as easily found as it was in the Unemployment code? Or is it there simply because at the time the codes were written, the legislators felt that such discussion more properly belonged in the Unemployment code than in the Tax code?

Is it reasonable that an assertion that "in California, sick pay is taxable" is not incompatible with the statement "California taxes sick pay, but only until until six calendar months have expired since the employee last performed services for the employer"?