Group Disability insurance is also a common fixture in employee benefit packages. Disability insurance protects employees who are too sick or injured to work. It’s a very important safety net and, like Group Life (depending on the industry), Group Disability insurance is relatively inexpensive. Because the risk is spread out across several individuals, the insurance company can mitigate the risk if one employee becomes disabled. In addition, Disability is not designed to fully compensate the disabled employee, providing an incentive to return to work.
There are generally two types of Group Disability insurance: Short-term and Long-term.
As the name suggest, Short-term Disability insurance typically features a short elimination period—a waiting period before benefits are payable. For example, with an elimination period of seven days, benefits begin accruing and are paid on the eighth day in lieu of a regular paycheck. Benefits are determined as a percentage of gross pay, and usually last up to 180 days.
Most Long-term Disability policies begin distributing benefits after 180 days, when the Short-term benefits would expire. The reasoning behind this is that, after 180 days, payroll taxes would no longer be due on Long-term Disability benefits. Fort this reason, both Short-term and Long-term policies are intentionally structured this way. If premiums are employer paid, income taxes are still payable on the gross amount of benefits received. Benefits are stated as a percentage of gross pay, and both plans feature a maximum benefit amount.
Many Disability plans also include buy-up options that the employee can elect, which would increase their benefit amount and come closer to fully replacing lost income. Since these buy-ups are voluntary and paid by the employee with after-tax dollars, the benefits received from a policy on the portion attributable to that which was paid for by the employee is tax-free for both Short and Long-term policies.
Taxes make Disability benefits seem minimal. Consider for a moment someone that earns $10,000 per month in gross pay. Let’s also assume a 30 percent tax rate. Normally, this person would have take-home pay of $7,000 per month. Now, suppose this person became unable to work due to a covered illness or injury. Let’s also assume that his or her Disability benefits were 60 percent, a typical percentage. 60 percent of $10,000 is $6,000 and, because this is an employer-paid benefit, it’s also subject to income taxes. Assuming the same 30 percent rate, the new take-home is $4,200, or 30 percent of $6,000. That’s a pretty severe pay cut, and a pretty good incentive to get well.
There are many differences between Disability policies from different companies—even more than for individual policies. Another option is a qualified Sick-pay plan. The employer actually pays wages to the disabled person like the policy does, only the wages come directly from the employer. This plan is a non-insured plan.
Please allow us to illustrate which plan may make the most sense for your organization. We can help navigate the course.