The Case Against Employer Paid Long-Term Disability Coverage

May 2, 2018

Posted in Employee Benefits by

Offering employer-paid benefits is a great way to attract and retain highly qualified employees.  However, employees may benefit more by paying for one type of insurance on their own:  long-term disability.

Long-term disability coverage is an often overlooked but very important employee benefit.  Long-term disability insurance picks up where a short-term policy leaves off, usually three to six months following a disability.  It will usually cover 60% of an employee’s salary until he or she can return to work.  In the case of a total disability, the policy can pay an employee up to social security retirement age.

There are varying statistics on the likelihood of becoming disabled during your working years, but one thing is for certain: not having coverage in the case of a disability can be completely devastating.  Perhaps more obvious in the event of a total disability, but what if an employee becomes disabled for a year or two?  A disability has major consequences financially, no matter the length of the disability.

Long-term disability premiums are often paid for by employers, partly because of the aforementioned fact that the benefits of the plan are often overlooked by employees.  When expensive medical premiums eat up an employee’s benefits budget, LTD policies are often left on the sidelines.  To entice more employees to enroll and thus driving down premium, employers will often offer an LTD plan as a value-added benefit of being an employee.  This arrangement however, can be a detriment to the employee in the event they need to file a claim.

If an employer pays the premium of a long-term disability policy, or if employees pay the premium pre-tax through a Section 125 cafeteria plan, employees must pay income tax on any benefit they collect, reducing their 60% benefit payment when they need this money the most.  It could leave them with just 40% of their regular salaried income.

Instead, employers can opt for a benefit tax choice option.  Tax choice plans gives employees the opportunity to decide whether to purchase benefits with either pre-tax or post-tax dollars.  By choosing to pay their own premiums with post-tax dollars, the employees can collect their benefit tax-free in the event of a claim.

Employee education is key to increasing participation in any plan, especially when considering tax implications.  It is essential to first educate employees about the benefits of electing to participate in a long term disability plan by giving real life examples of individuals who have been impacted by a disability, and then highlighting why it makes sense to pay the premium with post-tax dollars to achieve the greatest benefit.