Optional and Required Disability Benefits for Your Employees
Disability benefits are employee benefits that guarantee income if an employee cannot work due to illness or an accident. Disability benefits can be optional or mandated by law.
Employers may choose to offer disability benefits to employees who are out of work because of an accident or illness. Most importantly, the illness or injury does not have to be work-related. Long-term and short-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.
Short-Term Disability Policies
Short-term disability policies are private policies that you can buy for your employees. Short-term disability insurance is designed to provide income to employees who become disabled due to sickness or an accident and are unable to work after an initial waiting period (generally, one to seven days). Short-term benefits are usually expressed in terms of the maximum number of weeks that the plan will pay (the industry standard is 26 weeks). Government statistics show that these benefits typically replace about 50 percent to 67 percent of an employee's income.
How short is short-term? Benefits payment is usually 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 satisfy a waiting period before disability benefits will begin being paid. During the waiting period, employees are likely to use sick leave, vacation , or personal leave, if you offer those benefits. If an employee is collecting disability benefits and the duration of the disability exceeded the limits of the short-term policy, the employee would probably begin collecting under a long-term disability plan (if you offer one) or benefits would terminate.
Tax treatment of disability benefits. Amounts received by an employee through accident or health insurance for personal injuries or sickness are included in the employee's gross income to the degree they are:
- attributable to employer's contributions that were not included in the gross income of the employee
- paid by the employer
An employee's gross income does not include amounts received through accident or health insurance for personal injuries or sickness to the extent that the payments received:
- constitute payment for the permanent loss or loss of use of a member (i.e., arm, leg, hand, eye) or function of the body or the permanent disfigurement of the employee or the employee's dependent
- are computed with reference to the nature of the injury, not the period the employee is absent from work
Coordination with workers' compensation. If payments from a short-term disability would be reduced by any amount received from workers' compensation, you should inform your employees, either in a policy, a handbook, or other written statement. Don't rely on the offset provisions contained in the insurance contract with the disability carrier.
Long-Term Disability Policies
Long-term disability policies take up where short-term policies leave off, covering employees who become disabled and unable to work for longer periods of time (generally six months or longer).
How long is long-term? Long-term disability insurance typically provides 50 percent to 60 percent of pay to disabled employees, which continues to retirement age or for a specified number of months, depending on the employee's age at the time of disability. In most plans, benefits are paid for the duration of the disability up to the age of 65. Benefits are usually computed as a percentage of the employee's basic compensation prior to the disability. There is usually a maximum dollar amount per week or month.
Defining "disabled". Long-term disability insurance plans generally define "disability" in one of two ways: it can mean the inability to perform the tasks of one's own occupation or the tasks of any occupation at all. A plan may use both definitions of disability for separate periods of time. For example, for the first 24 months of a disability, disability may be defined as an inability to perform the employee's regular job. However, after that it may mean an inability to perform any job that the employee is qualified to do.
An employee does not have to be permanently disabled to receive benefits, but most plans require that the employee has to have been a regular, full-time employee for at least a 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 that the Social Security Administration determine or affirm that the employee is indeed disabled before they will pay. 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.
As with other employee welfare benefits, short and long-term disability plans may be subject to a federal law known as ERISA. Your administrative responsibilities should be fairly limited, since the company providing the insurance will probably act as the plan administrator, but you may be required to distribute information about the plan to your employees as part of a disclosure requirement. You may also be required to provide claim forms to employees and to provide the insurance company with information regarding an employee's eligibility status and compensation amount. Your insurer should provide claim forms and other necessary materials for your employees.
Make sure that you know up front which administrative responsibilities the insurer will be taking care of and what your responsibilities will be.
State and Federal Disability Programs
There are state- or federally-mandated programs for employees who
become disabled. They are not benefit programs, per se, in that you do
not have to purchase them as you would a conventional benefit plan, but
you may be required to pay for them, administer them in part, and
provide employees with information about them. These benefits include
state-run 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. The Social Security laws
require that the disability be of the type that will last at least 12
months if the individual is to receive any benefits. Also, there is
effectively a six-month waiting period before benefits will begin.
A disabled worker is entitled to monthly cash benefits beginning with
the first month in which the disabled worker meets all of the following
- has a qualifying disability as defined by the Social Security
Administration (i.e., is unable to perform any job for which the worker
is reasonably qualified)
- has filed an application for disabled worker's benefits
- has met the requirements for insured status
- has completed a five-calendar-month waiting period or is exempted from this requirement
- has not attained age 65
Benefits end when any of the following events occur:
- the individual dies
- the individual reaches retirement age
- the individual returns to work for at least three months
Interaction with other benefits. Social Security
disability benefits are reduced by whatever the individual receives from
workers' compensation. Benefits, however, are not reduced by what the
individual may receive from private insurance.
To get more information on how Social Security disabled worker benefits are administered, check out 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, the state
programs are a supplement to federal Social Security disability
benefits, since Social Security doesn't cover the first six months of
the disability. These state plans cover the period before Social
Security benefits would start up. They require contributions from
employers, much in the same way that the unemployment benefits program
is financed 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 don't have to worry about
this additional disability coverage and responsibility. The funds are
financed 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 failing to withhold the contributions.
All six places, except Rhode Island, allow an employer to opt
out of the state plan and to put the employee contributions into a
private plan. The 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, than
your state requires that any employer with one or more employees offer
temporary disability benefits to any employee who is unable to work due
to an illness or injury but who does 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 contributions
that you have to make to the state program are deductible as taxes.
Employees' contributions are also deductible. However, if you opt for a
private plan instead of a state plan, the contributions are not
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