Employers often choose to sponsor or maintain disability benefits that provide income protection for employees unable to perform the regular duties of their full-time occupation and experience a loss of earnings due to a non-occupational (off-job) illness or injury. Occupational (on-the-job) injuries or illnesses are generally covered by workers’ compensation insurance, which most employers are required to carry for the benefit of their employees under state law. Workers’ compensation insurance is generally the only recourse for employees with job-related disabilities/injuries unless the non-occupational disability plan includes benefits that supplement workers’ compensation coverage.

Employer-sponsored disability benefits will vary in the dollar amount paid, providing either full or partial wage replacement or salary continuation payments to disabled employees. As a matter of plan design, employers may provide the benefits through:

1. purchasing group disability insurance
2. offering employees the opportunity to purchase individual disability insurance
3. self-insuring the benefit through short-term wage continuation with direct payments from the employer’s general assets
4. some combination of the above three approaches

The two primary types of disability coverage employers provide to their employees are short-term disability insurance (STD) and long-term disability insurance (LTD).

Short-Term Disability

The primary difference between STD and LTD insurance is the length of time the employee will receive the benefit. As the name suggests, STD coverage is intended to only pay benefits/replace income for a shorter duration, typically three months to one year following a benefit waiting period (also referred to as an elimination period) in which no benefits are paid. The benefit amount will vary by plan, but STD plans often provide a greater percentage of income replacement than LTD plans during the coverage period. For example, an STD plan may replace 70% of an employee’s pre-disability income versus 50% of the employee’s pre-disability income under an LTD plan.

Long-Term Disability

LTD benefits will begin after the STD benefit has been exhausted and will typically continue for a period during which the employee is disabled, up to between two and ten years, or until the employee reaches age 65 or reaches Social Security Normal Retirement Age, depending on the plan. The elimination period (i.e., benefit waiting period) under an LTD plan is generally longer than for STD plans, lasting around 90 days. LTD benefits are primarily suited for situations in which the employee is injured and will be out of work for a longer period or even permanently.

The remainder of this overview identifies and discusses some compliance issues related to disability benefits.

State Disability Coverage Mandates

Several states, including California, Hawaii, New Jersey, New York, and Rhode Island, as well as Puerto Rico, require covered employers to offer short-term or temporary disability coverage either as part of a state-sponsored disability program or through short-term/temporary disability coverage (either fully insured or self-insured) provided by a covered employer to its employees. Like other STD plans, state-mandated disability programs provide wage replacement to employees unable to work for a specified reason. In addition to the definition of covered employer and employee varying under certain state laws, the elimination period and benefit amount also typically vary by state. Some states permit covered employers to offer disability insurance through an approved private plan insured by an insurance company or an approved self-insured short-term/temporary disability arrangement to satisfy their obligation under state law to provide employees with disability coverage as an alternative to electing to comply via a state-run program.

ERISA*

Under ERISA §3(1), the term “employee welfare benefit plan” specifically includes any plan, fund or program established or maintained by an employer to the extent that it is established or maintained to provide benefits to employees (or former employees) in the event of disability. As a benefit specifically listed under ERISA, disability plans will generally be subject to ERISA (and its plan document, amendments, Summary Plan Description (SPD), Summary of Material Modifications (SMM), Form 5500 annual return/report, and claims procedure requirements) unless an exemption applies.

*Employee Retirement Income Security Act of 1974

Regulatory and Legislative Strategy Group