I am a California resident currently on an extended disability plan
through my employer, an Illinois-based international pharmaceutical
company. This type of coverage is known as a Voluntary Plan, which CA
allows in place of SDI coverage. The Voluntary plan benefit payments
are equivalent to the state's rate for disability, which is currently
$728.00 per week.

My employer has been withholding both Federal and CA state taxes from
these payments each pay period. To my knowledge, if these same
benefits were being paid to me by the CA EDD, there would be no taxes
taken out (either Fed or State). In effect, I would have more income if
i were receiving SDI than if I remain with my employer and get my
benefits through their voluntary plan.

Above and beyond these $728.00/wk payments -  which come to me as
employer-issued paychecks - I receive an additional small sum from the
EDP insurance carrier (about $330.00/mo). This money is considered
income and also taxed.

My employer's insurance carrier told me that my employer is incorrect
in taking the taxes out of my checks, and therefore owes me a good sum
of money in retro-payment. However, my employer disputes this and has
told me that as the $728 is paid from them, and not the state, that
the amount is taxed.

As some additional info, my employers EDP is considered a "Welfare
Benefit Plan" under the ERISA Security Act of 1974 with a plan number
of 504. There are no special particular features of my employers plan
which would make it differ from the general voluntary plan EDP
methods, etc.

So my question is this: are my voluntary plan benefits taxable or not?
I don't dispute the money from the insurer, but the funds from my
employer, i believe, should not be being taxed, as they have for the
last seven (7) months.

Thank you so much for your help!

This may be of interest to you:

"Disability benefits are generally taxable if either your employer
paid the insurance premiums or you paid the premiums with pretax
dollars (such as with a cafeteria plan)."

http://partners.financenter.com/consumer/learn/guides/benefits/paytaxonbenefits.fcs

Similarly:

"If you paid for your own disability insurance with after-tax dollars,
the benefits are not taxable. If your employer provider the disability
insurance, paid the premiums and the premiums were not considered
taxable income to you, then the disability benefits are taxable."

http://forums.kiplinger.com/showthread.php?t=229