Disability Insurance -- CEBI Member Feedback

Within the past 3 weeks, three different Chief Executive Boards International members have asked their fellow members for a suggestion on how to handle the same thing -- an employee (generally long-term) who is currently on sick leave, and not likely to be able to return to work.

This is a real ethical, emotional and financial dilemma. One thing members are curious about is "what's the standard?" for most companies, and "what's right?" In polling CEBI members and mid-sized companies in general, the standards shake out like this:

1. In general, more mature (>10 years in business) and larger companies have Short-Term Disability insurance (STD), generally effective after 1 week's missed work. They also have Long-Term Disability (LTD) insurance, effective at either 90 or 180 days. This coverage goes hand-in-hand with a clear-cut Company Policy that specifies when an employee moves from Sick Leave to STD and then to LTD.
   
2. In general, less mature and smaller companies have no standard disability insurance at all. Unfortunately, most of these companies have no Company Policy on Disability, hence the quandary about how to deal with the question once it arises.
   
3. For those companies who want to do something about disability coverage, the first move is generally to add Long-Term coverage, which is far less expensive than Short-Term, due to the reduced likelihood of its being used.

Regardless of where your company falls in this spectrum, one thing you can do today is write a company policy on Disability. Remember, you don't need a major Employee Manual effort to get this done. All you need is a policy statement, similar to what you might have for sick leave or personal leave, that spells out what you will and won't do in the case of a disabled employee. You will, of course, as you probably do now, want to hand a hard copy of those policies to new employees, including a cover letter enumerating same, and requiring their signature to acknowledge they've received them.

If you're not ready to add the expense of company-paid disability insurance, you might also consider (I did this once in my own company) calling an agent, and asking him to write individual quotes for all your employees, for at least LTD and perhaps also STD. At that point you've at least done your part -- advised them of how long you'll carry them on sick leave, and offered them an easy option by which to cover themselves with almost no effort. Should they decline, when it happens that one of them becomes disabled, you'll at least be able to feel that you did your part.

There are variations in Disability Coverage. The "gold standard" of disability coverage is 60% of the employee's base salary. A huge consideration is "own occupation" -- will the person be covered if he can't do what he's been doing, or only if he can't do anything at all? Longer waiting periods, of course, are less costly. One cost-saving variation is to offer a "standard" (company-paid) LTD policy capped at a fixed benefit amount -- say, $2,500/month, with an option offered in the 125 ("Cafeteria") Plan to step that up to the full 60% at the employee's expense.

Important note: Remember that if the company pays the premiums, any future disability benefit payments are taxable to the employee as ordinary income. If, on the other hand, the premiums are deducted from the employee's pay after tax, any future disability benefit payments are tax free, since it's insurance the employee paid for with after-tax dollars. You stretch the value of the benefit a long way by making sure it's an after-tax deduction on the payroll, rather than company-paid.