When employees are unable to work for an extended period of time due to an illness or injury that’s unrelated to their job, it can be detrimental for both them and their employers. The workers experience financial hardship due to lost wages, while the employers suffer lapses in productivity. Worst-case scenario – talented employees who don’t have the support they need never return to work. A solution to this problem is short-term disability benefits.
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What is short-term disability insurance?
Short-term disability is an income replacement benefit that provides a percentage of pre-disability earnings on a weekly basis when employees are out of work on a disability claim. It typically covers off-the-job accidents and illnesses that workers’ compensation would not cover.
How does short-term disability insurance work?
Short-term disability varies based on the provider and state requirements. Generally, the options are:
- Traditional – employers pays the full premium
- Contributory – both employers and employees contribute to the benefit cost
- Core buy-up – employees have the option to purchase more coverage
- Voluntary – employees alone pay for disability benefits
Once enrolled in one of the plan options available to them, employees are eligible to receive a portion of their weekly wages if they become disabled. Wage replacements can range from 40% to 70% with a monthly benefit maximum in some cases.
Partial disability benefits
Employees who are only partially disabled may be able to work part-time and still receive 100% of their pre-disability earnings for the duration of their claim. This benefit helps incentivize employees to return to work.
Some insurance policies allow employees to partner with vocational rehabilitation counselors to create individualized return-to-work plans. Such plans may include job modifications or accommodations, transitional assignments and other reasonably necessary activities.
What qualifies for short-term disability?
The most common reasons for a short-term disability claim are:
- Pregnancy/maternity leave
To meet short-term disability qualifications, the medical condition must not be related to the work environment or job-related responsibilities, otherwise, it might be covered under the employer’s workers’ compensation insurance.
When do short-term disability benefits start?
Employees can begin receiving short-term disability payments on day one for accidents quoted as such. However, the typical start date for payments is the eighth day after a claim is filed.
How long does short-term disability last?
As the name implies, short-term disability is temporary. The duration of benefits, depending on the provider, may be:
- 13 weeks
- 26 weeks
- 52 weeks
Short-term vs long-term disability
Short-term disability is a weekly benefit with a limited duration – up to one year maximum in most cases. Long-term disability, on the other hand, is paid monthly and employees may receive benefits until they reach Social Security normal retirement age (SSNRA) or age 65.
How much does short-term disability pay?
Short-term disability pricing varies based on the employee’s age and weekly compensation. But according to the U.S. Bureau of Labor Statistics, the approximate cost for employers to provide both short- and long-term disability insurance to all private sector workers is 1% of total compensation cost, or $624 per full-time worker, per year.1
Is short-term disability taxable?
Whether short-term disability benefits are taxable depends on how the premiums are paid during the year of the disabling event. Here’s the breakdown:
- If premiums are paid entirely with pretax dollars, then the benefits that an employee receives upon becoming disabled are taxable.
- If premiums are paid entirely with post-tax dollars, then the benefits are not taxable.
- If premiums are paid with a combination of pretax and post-tax dollars, then the benefits are taxable on a pro rata basis, calculated using a three-year lookback period for group disability plans and a one-year lookback period for individual disability policies.
Benefits of short-term disability insurance?
To truly reap the rewards of short-term disability insurance, employers must weigh the up-front costs with the long-term benefits. For instance, if employees can’t afford to participate in the disability plan, it may diminish rather than enhance their morale. Employers who succeed in balancing cost vs. benefits may be able to:
- Attract new talent
- Retain valued team members
- Improve employee engagement
- Enhance employee financial wellness
What states require short-term disability for employees?
In most states, offering short-term disability insurance is optional, but there are a few jurisdictions that mandate disability and/or paid family medical leave. These include
- New Jersey
- New York
- Puerto Rico
- Rhode Island
Frequently asked questions about short-term disability
What triggers short-term disability?
Short-term disability claims generally stem from injuries and illnesses that are not the result of a work-related activity. Maternity leave may also qualify.
What is the difference between short-term disability and FMLA?
One of the notable differences between short-term disability and the Family Medical Leave Act (FMLA) is that short-term disability is paid and FMLA leave is not. Other FMLA differences compared to short-term disability include the length of leave, qualifying reasons for leave and employee eligibility.
What is the elimination period for short-term disability?
Common elimination or waiting periods for an illness or accident are seven, 14 and 30 days. In some cases, an accident may result in distribution of benefits on the day the injury occurs.
Can you go on short-term disability for anxiety, depression or stress?
Short-term disability generally covers behavioral health issues, which can include anxiety, depression and stress. However, the claims process for these conditions tends to be more difficult. Claims analysts may need all of the medical records pertaining to the diagnosis so they can evaluate what is preventing the employee from working.
How do I ask my doctor for short-term disability?
Employees who plan to apply for short-term disability should notify their attending physicians so they can gather the necessary forms and supporting records.
This article is intended to be used as a starting point in analyzing short-term disability and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.