Disability Insurance: A Key Benefit for Employers and Employees

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HR professionals can appreciate that health insurance is a crucial employee-sponsored benefit but there may be another, nearly equally important benefit that’s often hidden in the wings: disability insurance. Health insurance offerings are an evergreen consideration for current and prospective employees, but the value of long-term disability insurance is just now taking center stage. After all, you don’t need it… until you do.

The COVID-19 pandemic – and the drastic and sudden life changes that continue to come as a result – finds employees feeling more vulnerable than ever before. As an HR professional, you may encounter colleagues who are wondering, “How can I protect my income if I’m out of work because of illness or injury?” In response, employers might feel compelled to offer disability insurance for the first time, review and update their current plans, or re-acquaint their employees with an existing benefit.

To get a better handle on what’s driving this new view on disability insurance, we’ll need to widen our lens, exploring employer and employee perspectives, disability statistics and changes in the federal and state requirements for coverage.

Viewing Disability Insurance Through a Wider Lens

Income security has become a topic of concern for many employees. When the pandemic forced huge numbers of businesses into shutdown mode, employers scrambled to find a path to stability, and workers struggled with continued economic uncertainty.

According to a recent LendingClub survey, over half of adults in the U.S. live from paycheck to paycheck and 11% are struggling to pay their monthly bills.1 The circumstances of the pandemic only compound existing financial anxieties. 

When workers realized just how quickly life could change – and how easily their sources of income could be threatened – they needed a solid back-up plan in order to keep food on the table and give them peace of mind. Some took a closer look at their benefits packages to see if they had any form of income protection. Others joined The Great Resignation, resigning from their jobs in favor of positions that gave them greater support and flexibility. 

Your employees may be thinking that the need for disability insurance doesn’t apply to them, but the data suggests otherwise. The Social Security Administration reports that 1 in 4 current 20-year-olds will become disabled before their 67th birthday.2 According to the CDC, 61 million adults in the U.S. currently live with a disability,3 and the U.S. Census Bureau reveals that for every dollar earned by non-disabled persons, those living with disabilities earn an average of only 66 cents.4 

While the Paid Family Medical Leave Act (PFML) has yet to pass at the federal level as of this writing, a handful of states have already passed their own Paid Family Medical Leave laws. Since disability insurance coverage integrates with many federal and state leave requirements – and equalizes disability benefits across all states, many employers would be wise to offer a robust disability plan that is insured and funded by employer and/or employee contributions as well as any applicable government programs. 


Opportunity: How Employers Can Optimize Disability Insurance

When was the last time you assessed your disability offerings?  If it’s been a while, you might discover that your current offerings are insufficient or out of step with the values and priorities of your evolving workforce.  

Many disability insurance carriers have opted to lower the cost of short-term disability coverage as workers are generally seeing a higher benefit with their state issued PFML plans than their employer sponsored short-term disability plan. With both PFML and short-term disability plans paying a percentage of weekly pay, and the PFML maximum dollar amount being higher than many STD plans, lower paid employees often do not have a need to “bridge any gap” with short-term disability insurance. 

On the opposite end of the spectrum, as you re-evaluate your disability insurance offerings, you should determine whether your existing benefit leaves out higher earning employees. Where a lower wage earning employee’s pay may be covered by the state issued PFML weekly maximum, a higher wage earning employee may need a short-term disability plan offering with a higher weekly maximum in order to bridge the gap between their benefit the state issued maximum.  

As an HR professional, you understand the toll this pandemic has taken on employees’ overall wellbeing, including their mental health. Growing mental health concerns highlight the importance of plans that include coverage for disability due to mental health. For a clearer picture of the financial impact of mental health treatment, take a look at these facts:

  • About half of individuals who seek therapy require 15-20 therapy sessions.5 
  • The average duration for treatment of an individual who develops an underlying mental health issue because of a physical condition requires 67 days longer for treatment and the costs increased by over $65,000.6 
  • Treatment for substance use is multi-faceted, and usually ranges from 30-90 days, but full recovery can last a lifetime.7

You can see why it is prudent to question whether your long-term disability plan contains adequate allocations for mental health or substance use treatments that lead to full recovery, especially when considering that most plans include a two- or three-year limitation on paid benefits.

We understand that, in addition to the talent retention and the wellbeing of their employees, employers are concerned about the bottom line. Bear in mind when assessing your disability offering that there are taxability options you can leverage to broaden your benefits. You can take advantage of tax options for both short- and long-term disability plans that enable you to offer such benefits 100% tax-free. 

With a gross-up option, you pay 100% of the disability insurance premium and your employees must pay taxes on the premium, but not the benefit. By contrast, without a gross-up option, there is no tax on the premium, but employees are forced to pay taxes on the benefit.  Below is an example of the benefit for an employee making $100,000 a year in a 30% tax bracket. In this example, with the gross-up option, this employee will pay the $64 tax on the employer premium to receive their full $60,000 of untaxed benefit if they become disabled. Without the tax choice, the employee will receive $42,000 after taxes. 

Disability Insurance: What Do Employers Have to Lose? 

Of course, in most states you have the option to not offer disability insurance at all, but is that smart in the current job market? The United States is facing a historic labor shortage and, in today’s climate, workers hold all the cards.

Here’s what you need to know: 3.4% of workers quit their jobs as of November 2021, which equates to 4.5 million workers.8 As the need for new hires increases, workers have amassed greater bargaining power. Private job growth is on the upswing with 807,000 jobs up for grabs as of December 2021.9

With such fierce competition for top candidates, employers can draw qualified talent by offering the benefits that employees really want, disability insurance being one of them.

According to the U.S. Bureau of Labor Statistics, 42% of private employers offered employer-sponsored short-term disability plans in 2018, while 34% offered long-term disability plans.10 If you’re not offering an appealing disability insurance plan in comparison with other employers you’re putting talent acquisition and retention at risk. 

You can offer an enticing disability benefit while staying within your benefits budget. Consider opting for cost-sharing methods between employers and employees. You may even be able to designate different degrees of coverage, offering added benefits to upper-level employees. This allows you to attract and retain quality talent in management positions. It also acts as an incentive for junior employees to advance within the company. 

Final Thoughts 

Unfortunately, without a crystal ball, we can’t predict the job-market future, but employers can give themselves a leg up – and best prepare for unprecedented events such as the COVID-19 pandemic – by offering meaningful disability plans, keeping their antennae up for plans that offer riders for COVID-related illness. 

Even as the strain of the pandemic eases, employees will continue to be aware of how COVID affects their physical and mental health, and they will be more likely to “self-report” COVID-related health concerns. By including disability coverage in their employer-sponsored benefits, employers can offer a coveted benefit that protects employee income and ensure a first-rate workforce. It’s a win-win.

Curious how your benefits offering stacks up against competitors in today’s job market? Contact Innovo for a complimentary benefits consultation below, or learn more about Total HR, our HR consulting solutions. 

1 Reality Check: The Paycheck-to-Paycheck Report – PYMNTS.com and LendingClub, August 2021
2 Fact Sheet: Social Security – SSA.gov, June 2021
3 Disability Impacts All of Us – Centers for Disease Control and Prevention, September 16, 2020
4 Do People With Disabilities Earn Equal Pay? – United States Census Bureau, March 21, 2019
5 Clinical Practice Guideline for the Treatment of Posttraumatic Stress Disorder – APA, July 2017
6 The Truth About Mental Health and Claim Costs – GenexServices.com, May 20, 2021
7 Pathways to Long-Term Recovery: A Preliminary Investigation – Journal of Psychoactive Drugs, September 6, 2011
8 Record 4.5 Million Workers Quit in November – Society for Human Resource Management, January 4, 2022
9 ADP® National Employment Report™ – ADP Research Institute, December 2021
10 Employee access to disability insurance plans – TED: The Economics Daily, U.S. Bureau of Labor Statistics, October 26, 2018
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