Employer Guide to Short-Term and Long-Term Disability Insurance

Disability insurance replaces a portion of an employee's income when they are unable to work due to illness or injury. While not required by federal law for most private employers, disability insurance is a valued benefit that protects employees from financial hardship and helps employers retain talent.

Types of Disability Insurance

Employers typically offer two types of disability coverage:

Short-term disability (STD):

• Covers temporary disabilities lasting a few weeks to several months
• Typically begins after a waiting period of 7 to 14 days
• Usually replaces 60 to 70 percent of the employee's pre-disability income
• Benefit duration is typically 13 to 26 weeks
• Often covers recovery from surgery, pregnancy-related disability, and injuries

Long-term disability (LTD):

• Covers extended disabilities lasting months to years
• Typically begins after the short-term disability benefit ends or after a waiting period of 90 to 180 days
• Usually replaces 50 to 60 percent of the employee's pre-disability income
• Benefit duration may extend to age 65, Social Security normal retirement age, or a specified number of years
• Often covers chronic conditions, serious injuries, and illnesses that prevent return to work

State-Mandated Disability Insurance

Several states require employers to provide short-term disability coverage:

• California: State Disability Insurance (SDI) funded through employee payroll deductions
• New Jersey: Temporary Disability Insurance funded through employer and employee contributions
• New York: Short-term disability benefits funded by employers and/or employee contributions
• Rhode Island: Temporary Disability Insurance funded through employee payroll deductions
• Hawaii: Temporary Disability Insurance funded by employers with limited employee contributions

Employers in these states must comply with specific coverage requirements, contribution obligations, and reporting rules.

Employer-Funded vs. Employee-Paid Coverage

How disability insurance is funded affects tax treatment:

• Employer-paid premiums: Premiums are tax-deductible to the employer, but benefits received by the employee are taxable income
• Employee-paid premiums (after-tax): Premiums are not tax-deductible, but benefits received are tax-free
• Employee-paid premiums (pre-tax through Section 125): Premiums reduce taxable income, but benefits are taxable

Many employers offer a base level of employer-paid coverage with the option for employees to purchase additional coverage at their own expense.

Coordination with Other Benefits and Laws

Disability insurance interacts with several other programs:

• FMLA: Disability leave may run concurrently with FMLA leave if the employee is eligible
• Workers compensation: Work-related disabilities are covered by workers comp rather than disability insurance; most policies offset benefits by workers comp payments
• Social Security Disability Insurance (SSDI): LTD policies typically offset benefits by SSDI payments to prevent over-insurance
• ADA: An employee's disability may also trigger reasonable accommodation obligations
• State paid family and medical leave: In states with these programs, benefits may coordinate with employer-provided disability insurance

Selecting a Disability Insurance Provider

When choosing a disability insurance carrier:

• Compare premium rates, benefit amounts, and waiting periods
• Review the definition of disability used in the policy (own occupation vs. any occupation)
• Evaluate the carrier's claims management reputation and process
• Consider the financial strength and ratings of the insurance company
• Review any exclusions or limitations in the policy
• Determine whether the policy includes rehabilitation and return-to-work support