Short-Term Disability Policies

Short-term disability policies are private policies that you can buy for your employees. Short-term disability insurance is designed to provide income to employees who become disabled due to sickness or an accident and are unable to work after an initial waiting period (generally, one to seven days). Short-term benefits are usually expressed in terms of the maximum number of weeks that the plan will pay (the industry standard is 26 weeks). Government statistics show that these benefits typically replace about 50 percent to 67 percent of an employee's income.

How short is short-term? Benefits payment is usually expressed in terms of a maximum number of weeks (13, 26, or 52) of benefits for a single period of disability. While statistics show that most short-term disabilities last far less than 13 weeks, 26 weeks is the most common limitation on disability policies.

Waiting periods. Generally, an employee will be required to satisfy a waiting period before disability benefits will begin being paid. During the waiting period, employees are likely to use sick leave, vacation, or personal leave, if you offer those benefits. If an employee is collecting disability benefits and the duration of the disability exceeded the limits of the short-term policy, the employee would probably begin collecting under a long-term disability plan (if you offer one) or benefits would terminate.

Tax treatment of disability benefits. Amounts received by an employee through accident or health insurance for personal injuries or sickness are included in the employee's gross income to the degree they are:

• attributable to employer's contributions that were not includible in the gross income of the employee
• paid by the employer

An employee's gross income does not include amounts received through accident or health insurance for personal injuries or sickness to the extent that the payments received:

• constitute payment for the permanent loss or loss of use of a member (i.e., arm, leg, hand, eye) or function of the body or the permanent disfigurement of the employee or the employee's dependent
• are computed with reference to the nature of the injury, not the period the employee is absent from work

Coordination with workers' compensation. If payments from a short-term disability would be reduced by any amount received from workers' compensation, you should inform your employees, either in a policy, a handbook, or other written statement. Don't rely on the offset provisions contained in the insurance contract with the disability carrier.

Administration. If you purchase a policy through a company, an agent, or a purchasing alliance, the plan may be subject to a federal law known as ERISA. The company providing the insurance will probably be the plan administrator, but you may be required to distribute information about the plan to your employees as part of a disclosure requirement. You may also be required to provide claim forms to employees and to provide the insurance company with information regarding the employee's eligibility status and compensation amount. Your insurer should provide claim forms and other necessary materials for distribution to your employees.

Make sure that you know up front which administrative responsibilities the insurer will be taking care of and what your responsibilities will be.