Optional and Required Disability Benefits for Your Employees

Disability benefits are employee benefits that guarantee income if an employee is unable to work due to illness or accident. disability benefits may be optional or required by law.

Employers may choose to offer disability benefits to employees who are out of work due to an accident or illness. More importantly, the illness or injury does not have to be work-related. short-term and long-term disability policies are the two general categories of optional disability benefits. Employers may also be required to participate in state and federally mandated disability benefit programs.

Reading: Why do employers offer disability insurance to employees

short-term disability policies

Short-term disability policies are private policies you can buy for your employees. Short-term disability insurance is designed to provide income to employees who become disabled due to illness or accident and are unable to work after an initial waiting period (generally one to seven days). short-term benefits are generally expressed in terms of the maximum number of weeks the plan will pay (the industry standard is 26 weeks). government statistics show that these benefits typically replace 50 to 67 percent of an employee’s income.

How short is short term? Benefit payment is generally expressed in terms of a maximum number of weeks (13, 26, or 52) of benefits for a single period of disability. while statistics show that most short-term disabilities last far less than 13 weeks, 26 weeks is the most common limitation on disability policies.

waiting periods. Generally, an employee will be required to serve a waiting period before disability benefits will begin to be paid. During the waiting period, employees are likely to use sick, vacation, or personal leave, if you offer those benefits. If an employee is collecting disability benefits and the duration of the disability exceeds the short-term policy limits, the employee will likely start collecting under a long-term disability plan (if one is offered) or benefits will end.

tax treatment of disability benefits. Amounts received by an employee through accident or health insurance for personal injury or illness are included in the employee’s gross earnings to the extent whatever:

attributable to employer contributions that were not included in the worker’s gross income
paid by employer

An employee’s gross earnings does not include amounts received through medical or accident insurance for personal injury or illness to the extent payments received:

constitutes payment for the permanent loss or loss of use of a member (i.e., arm, leg, hand, eye) or bodily function or permanent disfigurement of the employee or the employee’s dependent
calculated with reference to the nature of the injury, not the period the employee was absent from work

coordination with workers’ compensation. if payments for a short-term disability would be reduced by any amount received from workers’ compensation, you must inform your employees, either in a policy, a manual, or other written statement. do not rely on the compensation provisions contained in the insurance contract with the disability insurer.

long-term disability policies

Long-term disability policies take over from short-term policies, covering employees who become disabled and unable to work for longer periods (usually six months or more).

How long does long-term insurance last? Long-term disability insurance typically provides 50 to 60 percent of payment to disabled employees, which continues until retirement age or longer. a specified number of months, based on the employee’s age at the time of disability. In most plans, benefits are paid for the duration of the disability through age 65. benefits are generally calculated as a percentage of the employee’s pre-disability basic compensation. there is usually a maximum dollar amount per week or month.

Definition of “disabled.” Long-term disability insurance plans generally define “disability” in one of two ways: it can mean the inability to perform the duties of the occupation or the tasks of any occupation at all. a plan may use both definitions of disability for separate periods of time. for example, during the first 24 months of a disability, the disability may be defined as the inability to perform the employee’s normal job. however, after that, it may mean an inability to perform any job for which the employee is qualified.

An employee does not have to be permanently disabled to receive benefits, but most plans require the employee to have been a regular full-time employee for at least one year to be eligible. the employee may no longer be eligible for regular sick pay or short-term disability benefits.

Some disability plans may require the Social Security Administration to determine or affirm that the employee is truly disabled before paying. The Social Security Administration uses an “any occupation” definition of disability and has a six-month waiting period, so this standard is difficult to meet. the amount received through social security payments may also reduce disability benefit payments.

warning

As with other employee welfare benefits, short-term and long-term disability plans may be subject to a federal law known as ERISA. Your administrative responsibilities should be fairly limited, as the company providing the insurance will likely act as administrator of the plan, but may be required to distribute information about the plan to its employees as part of a disclosure requirement. You may also need to provide claim forms to employees and provide the insurance company with information about an employee’s eligibility status and compensation amount. Your insurer must provide claim forms and other necessary materials for your employees.

Make sure you know in advance what administrative responsibilities the insurer will handle and what your responsibilities will be.

state and federal disability programs

There are state or federally mandated programs for employees who become disabled. They’re not benefit programs per se, since you don’t have to purchase them as you would a conventional benefit plan, but you may need to pay for them, manage them in part, and provide information to employees about them. These benefits include state-administered temporary disability programs in California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island, and federal Social Security disability benefits.

Also considered a type of disability benefit, workers’ compensation is governed by state law and provides payments to workers injured on the job.

federal disability benefits

The Social Security Administration provides disability benefits to workers. social security laws require that the disability be of the type that lasts at least 12 months if the person is to receive any benefits. plus, there is effectively a six-month waiting period before benefits start.

A disabled worker is entitled to monthly cash benefits beginning with the first month in which the disabled worker meets all of the following conditions:

has a qualifying disability as defined by the social security administration (i.e. unable to perform any job for which the worker is reasonably qualified)
has filed an application for worker disability benefits
has met the requirements for insured status
has completed a five calendar month waiting period or is exempt from this requirement
has not reached the age of 65

Benefits end when any of the following events occur:

individual dies
person reaches retirement age
person returns to work for at least three months

Interaction with other benefits. Social Security disability benefits are reduced by how much an individual receives from workers’ compensation. benefits, however, are not reduced by what the individual may receive from private insurance.

work smart

For more information on how Social Security benefits for disabled workers are administered, see the Social Security handbook.

state disability benefits

Five states and Puerto Rico currently have a program that provides short-term disability benefits for employees. in effect, state programs are a supplement to federal social security disability benefits, since social security does not cover the first six months of disability. These state plans cover the period before the start of social security benefits. they require contributions from employers, in the same way that the unemployment benefits program is funded by the employers of the employees it covers.

If your business is not located in California, Hawaii, New Jersey, New York, Puerto Rico or Rhode Island, you do not have to worry about this additional disability coverage and liability. The funds are funded by employees’ payroll deductions, and in Hawaii, New Jersey, New York and Puerto Rico, employers also contribute. An employee’s contributions are based on the employee’s earnings and are withheld by the employer and transferred to the state fund. there are severe penalties for not withholding contributions.

all six locations, except rhode island, allow an employer to opt out of the state plan and place the employee’s contributions into a private plan. plans must meet state requirements regarding coverage, eligibility, contribution amounts, and employee approval.

If your business is in a state that has a disability program, then your state requires any employer with one or more employees to offer temporary disability benefits to any employee who is unable to work due to illness or injury, but who not qualify for unemployment benefits or workers’ compensation. For more information about your state’s program, you can contact your state labor agency.

tax implications for employers. any contribution you have to make to the state program is tax deductible. employee contributions are also deductible. however, if you choose a private plan instead of a state plan, contributions are not deductible.