Are Attorney Fees for ERISA Long Term Disability Cases Tax Deductible?

Pursuing your ERISA long term disability (“LTD”) benefits can be a long and frustrating process, and many claimants wonder whether the attorney fees they pay can be deducted at tax time. The rules surrounding legal fee deductions are complex, especially when disability benefits, employment-related claims, and changing tax laws all intersect.

Below, we break down the key questions claimants ask about when these fees are deductible, how ERISA influences the analysis, and what recent legislation means for your tax return.

Before reading on, please consulting a tax professional - a tax attorney or an accountant - to determine whether legal fees for disability claims are taxed. Everyone's situation is different.

Can I deduct the attorney fees paid to secure my ERISA long term disability benefits?

Yes, you may be able to deduct the attorney fees you paid to secure your ERISA long term disability (“LTD”) benefits, but the deduction only applies in specific situations. The IRS generally allows you to deduct these fees when the benefits you recover are considered taxable income. Because many ERISA long term disability claims are treated as employment-related disputes, the tax code classifies certain legal fees as “above-the-line” deductions. This means you can subtract the qualifying fees directly from your gross income without needing to itemize your deductions.

Common situations where your fees may be deductible include:

• Taxable LTD Benefits: Your benefits count as taxable income because your employer paid the premiums or you paid them with pre-tax dollars.

• Employment-Related Claims: Your LTD claim is viewed as part of the employment relationship, which may allow fees to qualify under the Internal Revenue Code’s unlawful discrimination provisions.

• Properly Characterized Claims: Your claim is pled and resolved in a way that meets the IRS’s requirements for employment-related legal actions.

However, if your long term disability benefits are not taxable (for example, if you paid all premiums with after-tax dollars), you typically cannot deduct the related legal fees because there is no taxable income for the deduction to offset.

How does ERISA affect how attorney fees for long term disability claims are treated?

ERISA affects how your attorney fees are treated because it classifies long term disability claims as part of the employment relationship. When your claim is tied to your employment, the IRS is more likely to view your legal fees as related to recovering compensation or benefits you earned through work. This matters because certain employment-related claims qualify for “above-the-line” deductions, which allow you to subtract attorney fees directly from your income without itemizing.

In practical terms, ERISA’s role can influence your taxes in several ways:

• Employment Relationship: ERISA governs employer-provided long term disability plans, so the IRS often treats disputes over LTD benefits as arising from your job, making the related legal fees more likely to qualify for special tax treatment.

• Unlawful Discrimination Provisions: Some LTD cases fall under the Internal Revenue Code’s broad definition of “unlawful discrimination” claims, which can make your fees deductible above the line.

• Origin of the Claim: Because ERISA disputes stem from your rights under an employer-sponsored benefit plan, the IRS may view the “origin” of your claim as employment-based, which is a key factor in determining deductibility.

• Taxable vs. Nontaxable Benefits: ERISA governs the benefits themselves, but whether you can deduct fees depends on whether those LTD benefits are taxable once recovered.

While ERISA doesn’t guarantee that your attorney fees are deductible, it does place your LTD claim in a category the IRS often treats favorably for tax purposes—especially when the benefits you’re fighting for are taxable income.

Are attorney fees tax deductible if I recover taxable LTD benefits?

Yes, attorney fees are often tax deductible if you recover taxable long term disability benefits. When your LTD benefits are treated as taxable income (usually because your employer paid the premiums or you paid them with pre-tax dollars), the IRS generally allows you to deduct the legal fees you paid to secure those benefits. In these situations, your fees may qualify as an “above-the-line” deduction, which means you can subtract them directly from your gross income without itemizing.

This deduction usually applies when:

• Your LTD benefits are included in your taxable income, since the deduction is meant to offset the income you had to report.

• Your claim is tied to your employment, as ERISA LTD disputes often are, bringing them under the Internal Revenue Code’s provisions for employment-related legal actions.

• Your case is structured in a way that meets the IRS’s criteria, including how the claim is described and how the recovery is allocated.

The key point is that the deduction cannot exceed the amount of taxable LTD income you recover in that same tax year. If your benefits are not taxable, the fees generally cannot be deducted because there’s no related taxable income to offset. Consulting a tax professional can help you apply these rules accurately to your situation.

Are attorney fees deductible in LTD appeals, lawsuits, or both?

Attorney fees are probably not deductible for LTD appeals. Attorneys fees can be deductible for fees related to LTD lawsuits, but the deduction depends on whether the fees fit within the definition of Internal Revenue Code (IRC) Section 62(a)(20) or (21), which allows deductions for "attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination." The IRS clarified in Private Letter Ruling 200550004 that attorney fees and court costs expended for vindication of an ERISA claim fell within this definition. Neither the IRC section nor the private letter ruling discuss appeals made to an ERISA administrator or insurance companies.

This means that in most LTD cases, this means your fees may be deductible when:

• The fees relate to a court case.

• The benefits you’re pursuing are taxable.

• Your claim remains tied to the employment relationship, which typically includes both ERISA administrative review and ERISA lawsuits.

• Your case fits within the IRS’s definition of an employment-related dispute, such as one involving compensation or benefits earned through work.

If your LTD benefits are not taxable, or if your claim does not fall within the IRS’s definition of an employment-related action, then the attorney fees for lawsuits generally would not be deductible. If the attorney fees do not relate to a lawsuit, they are probably not deductible.

What if my LTD benefits are not taxable because my premiums were paid with after-tax dollars?

If your LTD benefits are not taxable because you paid your premiums with after-tax dollars, then your attorney fees are generally not tax deductible. The IRS only allows you to deduct legal fees when they relate to income you must report on your tax return. In this situation, your LTD benefits are excluded from your taxable income, so there is no taxable recovery for the deduction to offset.

Even though your claim may still be governed by ERISA and tied to your employment, the tax treatment of your benefits controls the outcome. Because the IRS limits above-the-line deductions to the amount of taxable income you receive from the action, a nontaxable LTD award leaves nothing for the deduction to apply against.

This means:

• Nontaxable benefits = no deduction, regardless of whether the case involves an appeal, litigation, or a settlement.

• Your attorney fees remain out-of-pocket expenses, and they cannot be claimed as a miscellaneous itemized deduction either, because that category was eliminated under the Tax Cuts and Jobs Act and made permanent under the 2025 legislation.

• The structure of your LTD plan determines the tax result, not the type of legal work performed.

If you are unsure whether your benefits will be taxable, a tax professional can help you confirm how your premiums were paid and how that affects the deductibility of your legal fees.

If my LTD claim includes back benefits and interest, can I deduct fees tied to those amounts?

Yes, you may be able to deduct the attorney fees tied to back benefits and interest, as long as those amounts are considered taxable income. The IRS generally requires you to include both back-paid LTD benefits and any interest awarded on those benefits in your taxable income when the underlying LTD payments themselves are taxable. Because these amounts increase your taxable income, the legal fees associated with recovering them may be eligible for an “above-the-line” deduction.

Here’s how the IRS typically views it:

• Back benefits: If your monthly LTD payments are taxable, then any retroactive benefits you recover are also taxable. Attorney fees related to securing those back benefits may qualify for deduction in the same tax year you report the income.

• Interest on back benefits: Interest is almost always taxable, and the legal fees attributed to recovering that interest can be deductible as well.

• Proportionate allocation: If you receive a lump-sum recovery that includes multiple components (e.g., back benefits, interest, penalties), the IRS expects you to allocate your attorney fees proportionally to the taxable portions.

• Annual limits apply: The total deduction cannot exceed the amount of taxable income you recover from the case in that tax year.

If any part of your recovery is not taxable—such as LTD benefits funded entirely with after-tax premiums—then the fees associated with that portion are generally not deductible. A tax professional can help you break down your award and allocate fees correctly to maximize any deduction you are entitled to claim.

Can I deduct attorney fees if I settle my LTD claim for a lump sum?

Yes, you may be able to deduct attorney fees if you settle your LTD claim for a lump sum, but only when the lump-sum payment is considered taxable income. The IRS looks at the nature of what you recovered—not the fact that it was paid all at once—so the same rules that apply to monthly taxable LTD benefits also apply to a taxable lump-sum settlement. If the settlement represents income that you must report, the legal fees you paid to obtain that settlement may qualify as an “above-the-line” deduction.

Here are the situations where the deduction may apply:

• The lump sum is taxable: If your employer paid your LTD premiums or you paid them with pre-tax dollars, the entire taxable portion of your settlement can support a deduction for attorney fees.

• The settlement represents taxable benefits: Even if the lump sum includes past benefits, interest, or future benefits discounted to present value, the taxable parts may allow you to deduct fees tied to those amounts.

• The claim is employment-related: Because ERISA LTD disputes stem from your employment, they often fall within the IRS’s definition of employment-related actions that qualify for above-the-line treatment.

Important limitations still apply. The deduction cannot exceed the amount of taxable income you recover from the settlement in that same tax year. If part or all of the lump sum is not taxable (for example, because you paid your premiums with after-tax dollars), then the attorney fees tied to the nontaxable portion generally cannot be deducted. For complex settlements that include multiple components, a tax professional can help you properly allocate the fees and determine what portion, if any, is deductible.

Can I deduct attorney fees paid across multiple years if my LTD case lasted a long time?

You generally cannot deduct attorney fees across multiple years, even if your LTD case took a long time to resolve. The IRS only allows you to deduct legal fees in the tax year when you actually receive the taxable income connected to those fees. This rule applies whether your case lasted two years or ten. The deduction is tied to the income recovered—not to when you paid the fees.

Here’s how the IRS treats long-running LTD cases:

• You must match the deduction to the year you receive the taxable LTD recovery, whether it’s monthly benefits, back benefits, interest, or a lump-sum settlement.

• If you paid attorney fees in earlier years, you generally cannot go back and claim deductions for those years. The deduction becomes available only when taxable income from the case is received.

• The deduction is capped at the amount of taxable LTD income you report in that same year, so even if you paid more in fees than you recovered, you cannot carry forward the excess.

• Timing of payments doesn’t matter—what matters is when the related taxable income hits your tax return.

If your recovery spans multiple tax years (for example, monthly reinstated benefits), you may have a deduction in each of those years, but only up to the taxable income received in that specific year. A tax professional can help you time the deduction correctly and avoid missing the year where the deduction is allowed.

Do contingency fees and hourly fees affect deductibility differently in LTD cases?

Contingency fees and hourly fees do not affect deductibility differently for LTD cases. For tax purposes, the IRS focuses on the nature of the income recovered, not the type of fee arrangement you have with your attorney. If your LTD recovery is taxable and your claim is considered employment-related, the legal fees you paid—whether contingency, hourly, flat fee, or a hybrid—may qualify for the same “above-the-line” deduction.

That said, your fee structure can affect how the deduction is calculated and reported:

• Contingency Fees: These are typically taken directly from your recovery, and the IRS treats the full recovery—including the portion paid to your attorney—as taxable income to you. Because of that, the fees you paid through the contingency can qualify for deduction in the year you receive the taxable income.

• Hourly Fees: Hourly fees you pay out-of-pocket may also be deductible as long as the related LTD benefits are taxable. The deduction is still capped at the amount of taxable LTD income you receive in that year.

• Allocation Still Matters: If your recovery includes both taxable and nontaxable components, you must allocate your fees proportionally, regardless of how they were billed.

• Timing Is the Same: For both fee types, the deduction is taken only in the tax year when the related taxable income is received.

So while the billing method may change how you pay your lawyer, it doesn’t change whether the fees are deductible. The key question remains whether the LTD benefits themselves are taxable and tied to the employment relationship.

How does the IRS evaluate settlement agreements in long term disability cases?

The IRS evaluates settlement agreements in long term disability cases by looking closely at what the payment represents and how the claim is characterized, rather than relying on the labels used by the insurance company or the parties. Because tax treatment depends on the nature of the income you receive, the IRS focuses on the underlying facts of your LTD dispute and the way the settlement is structured.

Here are the factors the IRS pays the most attention to:

• The true nature of the claim: The IRS examines whether your LTD case arises from the employment relationship, which is common for ERISA plans. If it does, the associated attorney fees may fall under the employment-related “above-the-line” deduction rules.

• What the payment represents: Settlement agreements sometimes lump everything together, but the IRS looks at whether the payment compensates you for back benefits, interest, future benefits, or other components. Back benefits and interest are generally taxable when the underlying LTD benefits are taxable.

• Taxability of the underlying benefits: The IRS determines whether the LTD benefits are taxable based on how premiums were paid—after-tax vs. pre-tax. Even a carefully worded settlement cannot convert taxable income into nontaxable income if the plan structure makes the benefits taxable.

• Allocation of the recovery: If your settlement includes multiple parts (e.g., taxable benefits, nontaxable benefits, emotional distress, or other claims), the IRS may require you to allocate attorney fees proportionally. It does not rely solely on how the agreement labels each portion if the label doesn’t match the facts.

• Consistency and documentation: The IRS reviews the settlement to confirm that the amounts you report on your tax return are consistent with the settlement terms. Keeping clear records of fees, benefit calculations, and settlement breakdowns helps avoid issues during review.

In short, the IRS evaluates LTD settlements based on substance, not form. A well-drafted settlement agreement that accurately describes the nature of the payment helps clarify which portions are taxable and which attorney fees you may be able to deduct. A tax professional can help ensure the agreement reflects the true structure of your recovery and supports the appropriate tax treatment.

Has recent legislation impacted the tax deductible nature of ERISA long term disability claim attorney fees?

Yes, recent legislation has affected the tax treatment of attorney fees in ERISA long term disability cases. The most significant change came in 2025, when Congress passed a major tax bill commonly referred to as the “One Big Beautiful Bill.” This legislation permanently extended the Tax Cuts and Jobs Act’s suspension of miscellaneous itemized deductions, which had been the category that previously allowed some individuals to deduct unreimbursed legal fees.

By making that suspension permanent, the 2025 law confirmed that long term disability claimants can no longer deduct attorney fees as miscellaneous itemized deductions, now or in the future. This eliminated what used to be the fallback deduction for legal fees that did not qualify under another part of the tax code.

However, the 2025 legislation did not change the separate “above-the-line” deduction available for certain employment-related and unlawful discrimination claims under the Internal Revenue Code. That deduction remains intact and continues to be the primary way ERISA long term disability claimants may be able to deduct attorney fees—but only if their case falls within the narrow criteria required for this type of deduction and only if the LTD benefits recovered are taxable.

What this means for your LTD case is straightforward:

• The 2025 law removed no longer-used deductions, rather than opening new ones.

• There is now only one potential path to deduct LTD attorney fees: the “above-the-line” category for qualifying employment-related claims.

• Whether your claim qualifies depends on how the case is framed and whether the recovered LTD benefits are taxable.

A disability insurance attorney can help you understand how your claim is structured and what documentation you may need, but you should always consult a tax professional to determine how the 2025 legislation applies to your individual tax situation.

What documentation can support an LTD-related attorney fee deduction?

To support an LTD-related attorney fee deduction, you should keep detailed and organized documentation that clearly shows what you recovered, whether that recovery was taxable, and what you paid your attorney. The IRS requires your records to demonstrate both the nature of the income you received and the connection between that income and the legal fees you are deducting. Keeping thorough documentation also helps prevent disputes if the IRS ever reviews your return.

The most important documents to keep include:

• Your Long Term Disability Policy and Summary Plan Description: These demonstrate how premiums were paid and whether your LTD benefits are taxable.

• Premium Payment Records: Pay stubs, W-2s, or employer benefit statements that confirm whether premiums were paid with pre-tax or after-tax dollars.

• Attorney Fee Agreements: Your signed retainer with your disability insurance attorney that outlines your fee agreement.

• Invoices and Payment Records: Bills, payment receipts, trust account statements, and closing statements showing the exact fees paid.

• Settlement Agreements or Award Letters: These outline what your recovery represents—back benefits, interest, future benefits, or other components.

• Benefit Calculations from the Insurer: Documents confirming how back benefits, offsets, and interest were calculated.

• 1099 Forms (if issued): Some insurers issue a 1099 for taxable settlements or interest, and these forms help substantiate the income you report.

• Correspondence Clarifying the Nature of the Payment: Any emails or letters from the insurer or plan administrator explaining the structure of your recovery.

A disability insurance attorney can help you obtain and organize much of this documentation, especially items such as policy records, benefit calculations, and settlement breakdowns. However, you should always seek guidance from a qualified tax professional when determining how to report your recovery and whether your attorney fees are deductible. They can ensure your records are complete, properly categorized, and sufficient to support your deduction.

How Can The Maddox Firm Prove My Short or Long Term Disability Claim?

When you’re facing a short or long term disability claim, the process can feel overwhelming. The Maddox Firm is here to guide you through every step, ensuring your claim is built on strong evidence, presented clearly, and protected from common insurance company tactics. Our experienced legal team takes a comprehensive, hands-on approach designed to give you the best chance of securing the benefits you deserve.

Here are a few ways we can help prove your short term or long term disability claim:

• We Examine Your Policy and Assess Your Claim: We review every detail of your disability insurance policy to determine your coverage, identify potential obstacles, and develop a strategy tailored to your specific condition and occupation.

• We Handle All Communications with Your Insurance Company: We manage all correspondence, requests, and follow-up with your insurance company so you don’t have to. This prevents misunderstandings, protects your rights, and ensures they cannot twist your statements or delay your claim.

• We Help You Obtain Evidence to Support Your Claim: We work directly with your medical providers, employer, and specialists to gather the strongest possible documentation, including medical records, narrative reports, vocational assessments, and other proof that supports your inability to work.

• We Handle Appeals and Litigation: If your claim is denied, we prepare a thorough administrative appeal backed by medical and vocational evidence. And if your insurance company still refuses to pay, we are fully prepared to pursue your case in litigation to fight for the benefits you are owed.

A short term disability or long term disability claim can be a complicated process.  If you need help during the claims process, with appealing a claim denial, or with litigating a final adverse short term or long term disability decision, The Maddox Firm can help.  The experienced team at The Maddox Firm will examine your insurance policy, correspondence from your insurance company, medical records, and any other relevant documentation in order to give you personalized guidance on how we can help you win your short and/or long term disability claim.  Our New Jersey and New York long term disability attorneys help clients nationwide.

Contact us to help you file your claim, appeal, or litigation the right way.