Disability: The Long and Short of It

November 19, 2008

Disability: The Long and Short of It
From the PHCC Educational Foundation via third-party

What is your most important asset?  If you are a homeowner, you might answer your house.  If you are fortunate enough to have a sizeable retirement account, that might be your answer.  But in reality, your biggest asset is your ability to earn income.  A 35 year-old person earning $30,000 per year has more than 30 years until social security retirement.  During those 30 years, he or she will earn over $900,000 – and that is without a raise or promotion.   So what happens if you have an accident or become ill and lose your ability to earn an income?  Do you have the savings or other ways to cover your living expenses and out of pocket medical expenses for months, let alone years?  And your employees, do they have the ability to weather the financial burden of a disability?  Will you feel obligated to help your employee or his or her family if there are no other resources?  Disability insurance is one way to provide a percentage of income lost due to an insured individual’s inability to work.

According to a variety of surveys, almost 1 out of 3 people between the ages of 35 and 65 will suffer a serious disability that affects their ability to work.  If the disability is a result of a work related accident or illness, workers compensation will provide medical and wage benefits (see October article).  However, if the accident or illness is not job related, and 89.5% of long-term disabilities are off-the-job accidents or illnesses, disability insurance can provide at least a portion of an employee’s pre-disability income.  Both individual and group disability plans exist and are an important part of a comprehensive financial security plan; however, most people rely on their employer’s group disability plan, as individual coverage is often expensive and difficult to qualify for.

Short Term Disability (STD)
Group STD pays a percentage of an employee’s earnings if the employee is disabled and unable to work for a short period and is under the care and treatment of a physician.  STD typically pays 50 percent, 60 percent or 66 2/3 percent of pre-disability income for a benefit period of 13 to 26 weeks.  Benefits are based on weekly earnings and plans have a limit on the benefit amount.  For example, if an employee earns $623 a week, and the policy pays 50 percent of pre-disability earnings with a cap of $500, the employee would receive $311.50 each week. 

STD benefits continue until the employee no longer meets the plan’s definition of disability or the benefit period ends.  There are two important points here.  First, the definition of disability varies and can include or exclude partial disability and residual disability.  Second, the carrier’s definition determines whether the employee is eligible for benefits based on the information provided by the employee’s doctor.  As part of the application for benefits, the carrier will expect information from the employee, the employee’s health care provider and the employer.  If there is a question as to whether the doctor’s information is complete or accurate, the carrier investigates and may ask the employee to see another doctor. 

Group STD premiums are typically a percentage of the weekly benefit and vary based on factors including the company’s employee census (age, gender, occupation), the maximum benefit amount, the elimination period and duration of benefits (see definitions later in this article).  For example, benefits can begin as early as the seventh day after an accident or as late as the twenty-first day; the longer the elimination period, the lower the premium.

Long Term Disability (LTD)
If an employee remains disabled after reaching the limit for STD benefits, LTD can provide longer-term benefits.  Ideally, the two policies are coordinated so the employee does not experience a gap in benefits and difficulty in filing a new claim.  Group LTD replaces a reasonable portion of an employee’s income if the disability lasts longer than the elimination period specified in the plan (typically the benefit period of STD).  LTD benefits are a percent of pre-disability income and based on monthly wages.  For example, if an employee earns $5,000 a month and the policy provides 60% of the pre-disability wage up to a maximum of $2,000, the employee will get $2,000, the maximum.

Group LTD benefits continue until the employee no longer qualifies for the benefit either because he or she no longer meets the definition of disability or has reached the maximum allowable period for the specific claim.  For some claims, there is a limit.  For example, self-reported symptoms might be limited to a 2-year benefit period.  For others, the benefit period may continue until the claimant reaches Social Security retirement age.

Group LTD is based on the monthly volume of wages and, like STD, premiums vary based on plan specifics.  Because the benefit period can conceivably last for decades, the definitions and terms are critical.  For example, there may be an earnings test for continued benefits.  If the claimant can earn 80% of his or her pre-disability income regardless of whether it is in an unrelated field to the person’s training or education, he or she may no longer qualify for benefits.

General Recommendations
• It is important to note that the insurance company determines what qualifies as a disability. The burden is on the employee to provide information from his or her health care provider.  You can help the employee with the claim process but do not imply an employee is eligible for benefits as, if the carrier disagrees, this may produce issues that are difficult to resolve.

• Keep your salary information up to date with the carrier.  Reported wages are the basis for premiums and therefore the basis for benefit amounts.  Some carriers use a look back method to determine the benefit amount; the last several months are reviewed to ensure the employee’s benefit is not based on a recent increase. 

• It is in everyone’s best interest to get employees back to work as soon as possible.  There are other costs associated with absence such as lost productivity and the strain on other employees.  Return to work will be the insurance carriers goal too.  The longer an employee stays off the job, the less likely the employee will return to work.  Ultimately, returning employees to work quickly affects costs and premiums.  Similarly, it is in everyone’s best interest to prevent fraudulent claims.  If you think a claim is suspicious, contact the carrier and let them investigate.

• The devil is in the details.  Understanding the definitions and fully recognizing the implications of plan detail choices such as own occupation or any occupation are important to make an informed decision in selecting coverage.  A good insurance broker or human resources professional can guide you through the process.

• Who pays the premium matters.  If the employer pays the premium, benefits are taxed.  (Imagine the transition from a full salary to 60% of your salary less taxes.  The effective income is about 50% of pre-disability income.)  If the employee pays the premium, the benefit is untaxed and the employee would receive the full 60% of his/her salary as a benefit.  However many policies require a high level of participation to cover the group and the only way to get participation is for the employer to provide the benefit without cost to the employee.  There are a variety of ways to overcome this dilemma and a knowledgeable Human Resources professional can help navigate the choices.

The Law
STD and LTD coverage is private insurance offered through individual or group plans.  Coverage varies between insurance policies.  A handful of states have state disability programs that require employer participation or employers to purchase private insurance that is better than the state mandated program.  The states with these programs are California, Hawaii, New Jersey, New York, Rhode Island, and the Commonwealth of Puerto Rico.  In addition to the state programs, there are also federal wage replacement programs - Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).  The federal programs do not require an individual to be part of a group but the eligibility requirements are often difficult to meet.  While some people believe that if they become disabled, government programs will provide adequate coverage, the fact is that in 2006 the average monthly Social Security disability payment was $939.  And of individuals that applied for Social Security benefits, only 39% qualified.

Conclusion
Deciding whether to offer STD, LTD or both is difficult especially during tough economic times.   Employers need to balance the cost of benefits with their role as a caring employer.  By making coverage available to your employees you too have access to disability coverage at group rates.  An employer can provide just one benefit and offer the other as a voluntary benefit the employees can elect or decline.  Another option is to offer a skeleton plan and allow the employee to voluntarily purchase additional coverage.  There are new products on the market that make disability plans more affordable for small businesses.  They include conditions for eligibility of benefits, such as a hospital stay, to limit benefits to the more serious situations.

And yet another option is self-insure for short term absences from work.  One small business located in Virginia kept meaning to purchase STD but never got the coverage. In the span of a few months, one employee underwent cancer treatment and another took maternity leave.  The employer struggled not only with the cost of covering the employees’ salaries, they found it difficult to define the amount and length of pay for the 2 very different situations.  Moreover, both employees had to face their leaves with the uncertainty of income during their absences.

If you purchase disability insurance, be sure to coordinate your paid leave with the plan.  How much sick leave to offer and how many hours to allow to accrue and carry over should make sense with the policy terms.  For example, if STD begins on the 15th calendar day after an accident, an employee may only need to accrue and carry over to the next calendar year 10 workdays of sick leave. 

Communicate the value of this benefit!  In 2007, only 26% of small employers offered STD and 18% offered LTD (companies with less than 99 employees).  If you elect to provide disability insurance, be sure to get recognized as being a good employer for providing a benefit that is not required (except in the 7 states noted above).  Do not just distribute the summary plan description and assume employees understand the plan and recognize its value.  Sell the benefit as part of your recruiting strategy; educate employees on the value of the plan by asking your broker or carrier to hold a seminar.  Education is especially important if you offer voluntary plans.

Disability Plan Definitions

Any Occupation – the ability to work at any occupation regardless of whether the position requires the training and education of the claimant’s pre-disability occupation.
Coordination of benefits - occurs when an individual is covered by more than one group; medical program and payments must be coordinated to avoid duplication of benefits.
Cost sharing - employees to pay a portion of the cost, sharing costs with employers. Forms of cost sharing include deductibles, copayments and coinsurance.
Earnings test - the ability to earn a percent of pre-disability income defined in the plan.
Eligibility - provisions in the contract that specify who qualifies for coverage.
Elimination period- the amount of time that has to lapse between the onset of the illness or the date of the accident and when benefit payments begin; may be a different date for accident and illness.
Guaranteed issue – no requirement for individual medical history or underwriting; applies to group plans and typically for companies of at least 10 or more employees.
Maximum benefit period – the longest period of time the carrier will pay for a specific claim.
Maximum monthly benefit – the most the carrier will pay in benefits for a month regardless of the claimant’s pre-disability income.
Monthly volume – the full amount of payroll covered by the plan that is used as the basis for determining monthly premiums.
Own occupation – the ability to work in the profession that the claimant’s education and training prepared them for before the disability.
Portable benefits – usually a characteristic of voluntary benefits, a covered individual can continue his or her coverage after he or she leaves the employer and loses eligibility for group coverage. 
Partial (or residual) disability – plan may pay benefits for a disabled person to return to work part time after full disability period; more generous plan may pay benefits for part time work from the on-set of the disability. 
Pre-existing conditions – illness or injury that existed before the onset of the current symptoms or condition and will limit coverage under STD benefits until after the pre-existing exclusionary period expires.
Premium waiver – most plans will waive the premium while an individual is receiving benefits.
Voluntary benefits – employer-sponsored benefits sold to employees at the worksite; often paid for through payroll deductions.
Weekly benefit – the amount paid to a claimant for a week under STD, typically 50%, 60% or 66.33% of weekly earnings with a cap set in the policy.

This content was provided by a third party via the PHCC Educational Foundation. Please consult your HR professional or attorney for further advice, as laws differ in each state.

The PHCC Educational Foundation, a partnership of contractors, manufacturers and wholesalers was founded in 1987 to serve the plumbing-heating-cooling industry by preparing contractors and their employees to meet the challenges of a constantly changing marketplace.

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