Managing Disability Benefits

Overview

The management of employee disability benefits is an important part of an overall employee benefits strategy. This toolkit examines the types of potential disability benefits employees may have access to. Along with the traditional short- and long-term disability benefits typically offered, this article discusses other employee benefits that can fall under the disability benefits umbrella. These can include leave benefits, some types of income replacement and, in some cases, benefits related to the accommodation of disabilities.

This toolkit also reviews how disability benefits affect employees and employers and describes HR's role in their administration. It discusses recommendations for managing these types of benefits, including determining eligibility, balancing the types of benefits available, how organizations decide whether to self-administer or to work through a third-party administrator, and how to communicate to employees about these benefits and measure their effectiveness.

Background

Disability defined

To understand the purpose and scope of disability benefits, it is necessary to be clear about what is considered a disability. Different types of benefits may have different definitions of a disability. Some may mirror the Americans with Disabilities Act (ADA) definition that indicates "an individual is considered to have a 'disability' if s/he has a physical or mental impairment that substantially limits one or more major life activities, has a record of such an impairment, or is regarded as having such an impairment."¹ Some benefits have less restrictive definitions and cover any medical conditions in which an employee receives treatment by a health care provider and is incapacitated for a certain period of time. Pregnancy and childbirth as well as minor outpatient surgical procedures are examples of conditions often considered covered disabilities for leave and short-term disability benefits that would not typically be covered disabilities under the ADA.

Disability benefits defined

Disability benefits can be broadly defined as any employee benefit that provides income replacement and/or job protection to employees who are unable to work due to illness or accident. These impairments can be either temporary or permanent.

Business Case

Employers often find employee benefits to be a significant driver of employee recruitment and retention. Heightened competition for talent and little growth in base salaries require HR professionals to use benefits offerings to attract and retain skilled professionals. Income or job loss due to a short- or long-term disability can be financially devastating to an employee, and providing a benefit to alleviate this potential can be a valuable resource that is relatively low cost to the employer. According to the U.S. Bureau of Labor Statistics (BLS), the cost of providing both short- and long-term disability insurance is approximately one percent of total compensation costs.² See Employee access to disability insurance plans.

Types of Disability Benefits

A number of different benefits fall under the umbrella of disability benefits. Most common are short- and long-term disability insurance; however, long-term care insurance, workers' compensation insurance and paid leave programs can also provide benefits to employees in the event of an injury or illness. See Benefits and Insurance for People with Disabilities.

Short-term disability insurance

Employers may offer short-term disability (STD) insurance plans that replace all or part of income due to temporary disabilities. An STD insurance plan does not provide an employee with job protection; requirements to hold an employee's job and reinstate the employee after a disability leave will generally be determined by an employer's internal policies and practices, as well as by state and federal laws such as the Family and Medical Leave Act (FMLA) and the Americans with Disabilities Act (ADA), discussed later. STD plans typically have a short front-end waiting period, such as seven days, for benefits to begin because many employers have paid-time-off programs that cover shorter-term absences. This waiting period also discourages abuse of disability insurance benefits. Income benefits are paid on a scheduled percentage-of-pay basis, typically 60 percent to 75 percent of the employee's base pay, and benefits may be coordinated with other income such as paid sick leave to ensure that income benefits do not exceed 100 percent of base pay. An employer can allow or disallow the supplement of paid sick leave or other benefits in coordination with short-term disability insurance as a matter of plan design. According to the BLS, the median length of short-term disability insurance coverage is 26 weeks.

Five states—California, Hawaii, New Jersey, New York, and Rhode Island—and Puerto Rico sponsor disability income plans that require employers to participate. See Which states require employers to have a short-term disability plan?

Employers in other states may voluntarily offer STD disability income plans on a fully contributory, partially contributory or noncontributory basis. The tax consequences of the income benefits received are based on whether the employee paid the entire cost or a portion of the cost of the plan or whether the employer paid for the entire plan. See Income tax treatment of short-term and long-term disability benefits.

Long-term disability insurance

Many employers also offer long-term disability (LTD) plans that work in tandem with their STD plans, so that when STD plan income benefits end, income replacement benefits under the LTD plan begin. LTD benefits for permanently disabled individuals may continue through the individual's normal retirement date or until the employee becomes eligible for Social Security disability benefits (discussed later), although some policies provide more limited income replacement benefits, for instance, for up to 24 or 36 months. Paid LTD income benefits are also coordinated with income from other sources when available.

More than seven out of 10 organizations (71 percent) report offering a group long-term disability plan for their employees, according to SHRM's 2022 Employee Benefits report.

BLS reports that most employers pay the full premium for LTD insurance plans and that employees are eligible for LTD insurance after a three to six month waiting period once they become disabled. See Disability Benefits.

As with STD benefits, LTD insurance does not provide an employee with job protection; requirements to hold an employee's job and reinstate the employee after an LTD absence will generally be determined by an employer's internal policies and practices, as well as by state and federal laws such as the FMLA and the ADA. See How long can an employee be on LTD before termination?

The tax consequences of LTD benefits received are based on whether the employee paid the entire cost or a portion of the cost of the plan or whether the employer paid for the entire plan. See Is the long-term disability I am receiving considered taxable?

Long-term care insurance

Long-term care insurance is designed to provide coverage for chronic illnesses and disabilities that are treated outside of a hospital when a person can no longer care for himself or herself because of prolonged illness or disability. Such services may include home health care, respite care, adult day care, nursing home care, hospice care or care in an assisted living facility. Long-term care insurance is purchased to protect a family's financial future.

More employers are offering long-term care insurance through their benefits packages because more employees are aging and requesting them. 20 percent of employers offered long-term care insurance according to SHRM's 2022 Employee Benefits Report.

There are two types of long-term care contracts: a nonqualified plan and a qualified plan. Premiums paid for nonqualified long-term care insurance are considered nondeductible personal expenses and offer no tax advantage. Qualified long-term care insurance contracts are treated as accident and health insurance contracts. Amounts received from them (other than policyholder dividends or premium refunds) are excludable in most cases from income as amounts received for personal injury or sickness. See IRS Publication 525 Taxable and Nontaxable Income.

Many different types of benefits can be covered in a long-term care plan. Employers considering a qualified plan should consult with a financial services professional for information on premiums, including age-based limits, taxes and other features.

Critical illness/supplemental insurance

Critical illness and supplemental insurance policies provide employees with a fixed, lump-sum payment following the diagnosis of a specific illness as outlined in the policy. "Cancer" policies are popular, but other illnesses, for example, stroke, heart attack and kidney disease, can be covered as well. In addition to lump-sum payments, some policies include a per-day benefit for certain treatments such as chemotherapy and for inpatient hospitalization or other medical care.

Critical illness benefit payments are made directly to the insured employee and can be used for any purpose, such as covering deductibles and co-payments, household expenses and travel expenses employees experience when they are diagnosed with an illness that requires extensive medical treatment and/or unpaid absences from work. According to a 2021 survey by supplemental insurance provider Aflac, almost half (46 percent) of all employees indicate that they would not be able to pay more than $1,000 in out-of-pocket costs for an unexpected illness or injury.

Critical illness/supplemental insurance policies are typically paid for by the employee with the employer facilitating payroll deductions and premium payments to the vendor. The premiums are not tax-deductible for an employee, but the benefits are received tax-free.

See:

Employees Want Voluntary Benefits but Don't Always Understand Them

A New Role for Critical-Illness Insurance in the Coronavirus Era

Voluntary Benefits Now Essential, Not Fringe

Employer support/patient navigators

Employers can provide support to employees experiencing chronic or long-term illnesses through programs that assist employees in navigating health insurance, disability benefits and treatment options that can be overwhelming after a diagnosis. In addition, employees will appreciate their employers simply being mindful of the impact of their practices that may be causing unwarranted stress on an employee with a disability, such as bureaucratic red tape or untrained employees. See Health Care Advocates Help Employees Through Serious Diagnoses and Helping Caregivers and Employees with Disabilities Select the Right Benefits.

ABLE Accounts

The Achieving a Better Life Experience (ABLE) Act allows states to create tax-advantaged savings programs for eligible people with disabilities, under Section 529A of the tax code. Employers can provide employees with information about the availability of ABLE accounts and consider making contributions to an employee's account. See ABLE Accounts for People with Disabilities Are a Timely Benefit and The ABLE Employer Toolkit.

Disability Leave Benefits

In addition to income replacement and other support services for employees with an injury or illness, there are multiple options for employee medical leaves of absences, both mandatory and voluntary.

Federal laws

The FMLA entitles eligible employees to take up to 12 weeks of unpaid leave in a 12-month period for medical reasons, for the birth or adoption of a child, and for the care of a child, spouse or parent who has a serious health condition. See How do I know if an employee's medical absence qualifies for FMLA leave? What is considered a serious health condition?

The ADA requires employers to consider reasonable accommodations for employees with disabilities. Leave from work may be a form of accommodation if it is reasonable and does not create an undue hardship for the employer. See When Must Employers Provide Leave Under the ADA? and When Does Lengthy ADA Leave Constitute an Undue Hardship?

State laws

Several states also have family medical leave laws that may provide job-protected leave to employees with disabilities. Employers should contact their state labor department or employment attorney for information on any state-specific family medical leave laws.

Paid-sick-leave laws have been popping up in states and cities across the country, too. These laws allow workers to accrue and use a certain amount of paid sick leave each year.

See Federal vs. State Family and Medical Leave Laws and Multistate Law Comparison Tool.

Employer policies

Employers may also develop their own policies beyond the legal requirement at the federal or state level to provide employees with rights to medical leaves of absences due to injury or illness. See Coordinating Leaves of Absence and How to Develop and Administer Paid Leave Programs.

Legal Matters

Americans with Disabilities Act of 1990

The ADA, designed to enable U.S. society to benefit from the skills of individuals with disabilities, gives civil rights protections to individuals with disabilities similar to those provided to individuals on the basis of race, color, sex, national origin, age and religion. The act prohibits employers with 15 or more employees from discriminating against qualified individuals with disabilities in job application procedures, hiring, firing, advancement, compensation, job training, and other terms, conditions and privileges of employment. Individuals with disabilities who are otherwise qualified are entitled to engage in an interactive process with the employer to find a reasonable accommodation that permits the individual to perform the essential functions of the job. The Americans with Disabilities Act Amendments Act of 2008 (ADAAA) made important changes to the interpretation of the term "disability." It rejected the holdings in several Supreme Court decisions and portions of Equal Employment Opportunity Commission (EEOC) regulations that had narrowed the group of individuals protected by the law. Although the amended law retains the basic definition of disability, the ADAAA changes the way statutory terms should be read and broadens the scope of protection for people with disabilities. The EEOC enforces the ADA and promulgates its regulations, enforcement guidance and policy, as well as provides additional compliance assistance and information.

See:

Accommodating Employees' Disabilities

Americans with Disabilities Act Resource Hub Page

The Americans with Disabilities Act: A Primer for Small Business

Federal and state family and medical leave statutes

As noted previously, the FMLA entitles eligible employees to take up to 12 weeks of unpaid leave in a 12-month period for their own medical reasons, for the birth or adoption of a child, and for the care of a child, spouse or parent who has a serious health condition. The FMLA applies to employers with 50 or more employees and guarantees eligible employees restoration to the same or equivalent position on return from leave. While the ADA includes hardship provisions for employers that are unable to accommodate an employee's disability, the FMLA does not include such provisions, and an eligible employee must be permitted to take a covered leave of absence. There are very limited exceptions to the job reinstatement requirement for certain key employees defined by the act.

See:

Fact Sheet #28: The Family and Medical Leave Act

Family and Medical Leave Act Resource Hub Page

Employers are advised to contact their state labor department or legal counsel for information on any state-specific family medical leave laws that may provide job-protected leave to employees with disabilities.

State workers' compensation statutes

Workers' compensation statutes exist in all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands. Workers' compensation is a benefit mandated in most states. It benefits employers by limiting its liability for job-related injuries and illnesses, and it benefits employees by providing guaranteed medical, wage-loss and other benefits. Employees who suffer workplace-related injuries or illnesses that result in disability may receive workers' compensation benefits for lost wages and/or medical expenses.

See:

Links to State Workers' Compensation Agencies

How to Administer a Workers' Compensation Claim

EEOC Enforcement Guidance: Workers' Compensation and the ADA

State temporary disability benefits laws  

Only a handful of states (California, Hawaii, New Jersey, New York and Rhode Island) and Puerto Rico have enacted temporary disability benefits laws. See Which States Require Employers to Have a Short Term Disability Plan? 

Social Security disability benefits

Social Security pays benefits to people who cannot work because they have a medical condition that is expected to last at least one year or result in death. Social Security does not provide disability benefits for partial or short-term disabilities. An individual may be able to work and collect Social Security Disability Insurance in some circumstances with limits on permitted earnings. Social Security offers a number of incentives to encourage individuals with disabilities to continue working, including:

• A trial work period that allows individuals to test their ability to work for at least nine months.
• A 36-month time frame after the trial work period during which individuals can work and still receive benefits for any month earnings are not "substantial."
• After benefits stop because of substantial earnings, a five-year period during which individuals can ask to start benefits immediately if unable to continue working.
• Continuation of free Medicare Part A coverage for at least 93 months after the nine-month trial work period. After that, individuals can buy Medicare Part A coverage by paying a monthly premium. Those with Medicare Part B coverage must continue to pay the premium and must request a cessation in their Part B coverage in writing.
• Possible deductions of disability-related expenses from monthly earnings before determining eligibility for benefits.

See Social Security Disability Benefits.

Other employment laws

Several other federal laws extend protection to individuals with disabilities in employment and the job application process. See Employment Laws: Disability & Discrimination.

Applicable federal and state laws embody the principles of prohibiting discrimination, guaranteeing restoration of employment following a leave of absence and replacing income from wages lost as a result of on-the-job injuries or illnesses. These laws often overlap and must be considered together in determining an employer's obligations to individuals with disabilities.

Global Issues

Disability leave laws can vary widely depending on the country and region. HR professionals managing disability leave policies and plans in multiple countries will need to take into account these differences. Employers should engage an international labor lawyer or consultant to provide information in countries of interest.

Endnotes

¹U.S. Equal Employment Opportunity Commission. (2008). Americans with Disabilities Act: Questions and answers. Retrieved from http://www.ada.gov/qandaeng.htm

² Bureau of Labor Statistics. (2022). Employer Costs for Employee Compensation - March 2022. Retrieved from https://www.bls.gov/news.release/pdf/ecec.pdf.

³Aflac. (2021). Workplace Benefits Trends: Executive summary. Retrieved from https://www.aflac.com/docs/awr/pdf/2021-overview/2021_aflac_workforces_report_executivesummary.pdf