Clients who I represent in ERISA cases who are able to win their benefits often ask if taxes will be taken out. It depends on who was paying the premiums. If you pay your own premiums, the benefit will not be taxable if it is ever paid out. If your employer pays the premiums, the benefits will be considered ordinary income. If you split the costs, you will pay taxes on a proportion equal to the proportion of the premiums that your employer paid.