STD (Short Term Disability) Insurance – Income Replacement Part 2

May 28, 2024 | AEB Insights, Employee Benefits

What is Short-Term Disability Insurance?

Short-term Disability Insurance (or STD or STDI) is one of two basic types of disability coverage; the other is long-term disability (to be covered in Part 3 of this series).

When an employee is unable to work, STD pays a benefit that replaces a percentage of their weekly or monthly income, depending on the specifics of the plan.[1] Like a paycheck, the benefits they’ll receive from short-term disability can be used for anything they want or need, including:

  • Rent or mortgage
  • Utilities
  • Credit card and loan payments
  • College or childcare
  • Groceries
  • Discretionary expenses such as entertainment

“STDI the most valuable workplace benefit that is most often overlooked.” [2]

Sharon Epperson at CNBC

Many STD plans include a rehabilitation component

All STD plans help tide over insured individuals with replacement income while they cannot work, but some can also help get them back to work faster. Many employers offer plans with added rehabilitation incentives and programs to help make the transition back to work easier. It’s an intelligent way to minimize the disruptive effects of disability – for companies and employees alike. [3]  Often, this rehabilitation component can ensure that the employee is safely recovered to return to work without the risks associated with premature returns.  Going back to work too soon can frequently result in relapses or complications leading to long-term disability.

Short-term disability and pregnancy

“The Family and Medical Leave Act (FMLA) requires most employers to give workers up to 12 weeks of unpaid family leave – and guaranteed employment upon return – for the birth of a child among other family care situations. However, according to the Bureau of Labor Statistics, only 15% of employees had access to paid family leave in 2017. If the employer does pay for family leave, then employees don’t need (and may not qualify for) short term disability. As mentioned before, not every policy covers pregnancy and childbirth. If yours does, then you can typically receive 6 weeks of coverage following a delivery without complications, or 8 weeks following a C-section.” [4]

Source:  Guardian Life  

About This Income Replacement Insights Series:

This is the second of a 5-part series of Insight articles to provide more specifics than addressed in our initial Disability Insurance Overview.  We will continue expanding content in Parts 3 through 5.  “Income Replacement” is considered synonymous with “Disability Insurance” but may also be present in some life insurance policies. For the purpose of this Insights series, our focus is on Disability Insurance.  These are the series topics:

  • Disability Insurance Overview – Income Replacement Part 1
  • STD (Short-Term Disability) Insurance – Income Replacement Part 2 – you are here
  • LTD (Long-Term Disability) Insurance – Income Replacement Part 3
  • Key Person Disability Insurance – Income Replacement Part 4
  • Overhead Expense Disability Insurance – Income Replacement Part 5

STD Insurance - Short Term Disability Insurance - AEB Insights Income Replacement Part 2 - employee sitting on edge of hospital bed with their phone

Essential Considerations in STD Plan Design

True to its name, short-term disability coverage is designed for temporary medical conditions that make up most claims. Generally, most people get STD as part of a group insurance plan through their employer, and in a handful of states (California, Hawaii, New Jersey, New York, and Rhode Island) [5], there are mandates where companies are required to provide it in connection with state short-term disability programs.

There are several disability-specific terms and provisions in a disability policy or contract, but these are the key features:

  • The benefit amount is the sum the insured receives each week or month they can’t work. It almost never replaces their entire salary but typically varies between 50% and 80% of their standard pay, depending on the plan’s terms. Some STD plans provide stepped benefits, e.g., 80% of their salary for the first eight (8) weeks, then 70% for the next eight (8) weeks.
  • The premium is the monthly amount the insured (or their employer) pays for the policy. Premium costs vary based on the benefit amount, period, and other factors.
  • The elimination period, also called the waiting period, is the period of time after the insured is disabled until they can start receiving benefits. A 14-day STD elimination period is typical, but it can range from 7 to 30 days. Employees often use vacation, PTO, or sick days to keep their salary going for as much of the elimination period as possible.
  • The benefit period is the length of time one can receive benefits. Most STD plans provide benefits for 3 to 6 months; some plans may have a more extended period, but not more than a year—that’s why there may be a need for long-term disability, too.
  • The definition of disability differs as every disability policy has a specific definition of what it means to be disabled to qualify for benefits.[6] Generally speaking, an injury or condition that renders the insured physically unable to do their job will usually be covered. However, some issues, such as mental illness or pregnancy, may or may not be covered, depending on the plan.

Why should employers consider offering STDI Plans?

1) Increased Job Satisfaction

Peace of mind is priceless, and when an employer provides this benefit to their employees, it is supportive in case their valued employee has an unexpected injury or severe illness. Publicizing such benefits in their employee benefits package can make a difference when prospects choose where to work.Many place as much value on their benefits package as their actual pay.

“Offering short-term disability coverage sends a clear message to employees that their well-being and financial security are valued and prioritized by the organization. It shows that the employer is committed to supporting their employees through difficult times, both on and off the job.” [7]

Source:  Resourcing Edge

2) Attract & Retain Talent

Offering STD coverage can help employers attract and retain top-tier talent. Prospective employees expect employers to offer competitive benefits packages, and while the employer might bear some initial costs, having a superb and competitive Employee Benefits Plan can be a strategic and significant loss leader or differentiator in the ability to hire and retain the ideal employees.

“51% of employers say that using benefits to retain employees will become even more important in the next 3 to 5 years” [8]

Metlife

3) Improving Employee Engagement

When employers invest in their employees, the return on that investment is often more engaged and motivated employees. Nearly eight in ten workers report not feeling actively engaged in their work, but those who do cite that their robust benefits package helps increase productivity and performance.

4) Help Employees Recover Properly

An employee’s financial pressures from an unexpected injury or illness can drive them to return to work prematurely and risk further health complications. This can lead to the potential for a long-term impact and increased unplanned absences. Providing peace of mind with STD encourages employees to stay home and recover properly, which, in the majority of such cases, often results in increased employee loyalty, not unlike the improved employee engagement described above.  This loyalty and appreciation are engendered directly by the insured and their fellow employees, who can empathize and anticipate that they might think, ‘If I would ever be in their shoes, my employer will take care of me with these excellent benefits.’

5) Comply with Labor Laws and Regulations

While some states require short-term disability coverage for their employees, Ohio does not. However, under the federal Family and Medical Leave Act (FMLA), eligible employees are entitled to up to 12 weeks of unpaid leave per year for certain family and medical reasons, including their own serious health condition. [7] There is a requirement that the employee’s job will be protected and available upon their ability to return after the 12 weeks. However, providing short-term disability coverage can help employers satisfy these legal requirements and provide income replacement during this period of time.  It is crucial for all to realize that STD insurance requires certification from qualified medical professionals and insurance carriers.  Businesses have no responsibility in making any determination of qualification for coverage. That insulates the company and provides peace of mind and protection from potential lawsuits or disputes should the insurer deny a disability claim. Should such an issue arise, the resolution is between the employee and the insurance provider rather than the employer. [7]

AEB’s Client Care Process and strategic plan design ensure that a company’s employee benefits plans comply with State of Ohio and Federal legal requirements and policy stipulations with various insurance carriers. AEB provides administration and compliance with all applicable laws and works with employers and employees alike so that everyone is correctly educated on the details of any plan.

6) Enhanced Risk Management

As already described above, STD insurance can help protect the employer from some legal claims and also help with an organization’s overall risk management strategy. Employers reputation is enhanced by such benefits to assist with recruiting and retaining top talent. STD can support workforce stability by reducing the potential for unplanned absences or an employee feeling the pressure to return to work prematurely that risks leading to a long-term disability claim or potentially one that might require unexpected ADA required accommodations.

Do Employers Have Other Options with STD Plans?

The short answer is ‘Yes.’ There are many additional areas where an employer can influence or decide how the plan should be tailored. Of course, AEB excels in understanding our client’s business and securing the optimal plans with our Strategic Design process. The following are additional examples that we can discuss to make the plan optimal for the company:

  • Employers can influence by choice the level of financial support employees can receive under the plan.
  • Employers can decide whether to pay in full for the benefits or make it an opt-in benefit where employees pay for the premium costs. When employers pay for the premiums or a co-op portion of the premium, the amount paid by the company can be deducted as a business expense.
  • Employers can offer a buy-up plan that provides a base plan (they pay for this) but allows their employees to increase their coverage with additional contributions.
  • Employers can opt into creative plans that provide coverage for worksite accommodations.*
  • STD plans generally have a waiting period before benefits can kick in. Still, employers may have options to vary the waiting periods by a specific number of weeks as a deterrent to any potential benefits abuse.
  • Some employers will allow their employees to use their PTO (Paid Time Off) to cover the gap period, as most policies cover a portion of an employee’s salary to discourage abuse.
  • Employers may be able to offer plans that provide coverage for different lengths of time over the typical three (3) months, extending from six months to a year or longer. All options are carrier-dependent and reflected in the premium cost.

*A job accommodation is an adjustment to a job or work environment that makes it possible for an individual with a disability to perform their job duties. Accommodations may include specialized equipment, modifications to the work environment or adjustments to work schedules or responsibilities. ” [9]

Source:  US Department of Labor 

Compliance & Administration

Disability benefits don’t come automatically – the insured has to file a claim.

Even if the injury or illness is apparent, the insured can’t just decide they cannot work and will file for disability.

  • Evidence is required with the disability claim submission – medical records – showing that the insured has a condition that meets the policy’s definition of disability.
  • Employers must demonstrate care in filing claims to comply with employee privacy and data security. In some cases, employers are not allowed to keep some information or even look at it.
  • The specific process and paperwork requirements vary from plan to plan; if the employee has coverage through work (versus an individual plan), their first step should be to contact the employer’s HR department (or responsible management). [10]
  • If the employee has an individual plan (coverage purchased directly from an insurer), their plan documents should clearly state how to contact the company to file a claim. [10]

AEB provides guidance and services in filing claims for all the companies and employees we help to cover.

STD Limitations

STD does not provide job protection.  An employer’s individual policies govern this issue in accordance with compliance with such federal laws as FMLA (Family & Maternal Leave Act) and ADA (Americans for Disability Act).

As STD has a finite time period, in an overall plan design, it is possible for employers to provide both STD and LTD coverage in their benefits package.

  • STD will cover the period of time before any LTD benefits would commence.
  • There are no federal laws that require an employer to offer LTD plans.

“It is more unusual for small businesses to offer both options, but about half of mid-sized and large employers do offer group LTD insurance.  In such cases, most employers fully pay for these plans and therefore, it is a considerably positive tool to Attract & Retain Employees in a very competitive marketplace.” [7]

Source from Resourcing Edge

Conclusion

STD is Both An Affordable and Cost Effective Solution for Employers to Offer.

The Bureau of Labor Statistics estimates the average cost to provide STD ranges from six cents to ten cents per hour. STD can be an important component in the strategic design of an Employee Benefits Plan when bundled with healthcare and other types of insurance.

The typical individual will find purchasing a Short-term Disability Policy on their own is very expensive and may cost about the same as an individual Long-term Disability Policy.  But with a licensed broker like AEB, we have the knowledge and connections to leverage multiple employers with carriers to obtain more affordable STD Insurance Group Plans.

The up-front costs of STD for the employer are generally recouped in other ways, such as lowering the expense of unanticipated absence, improving employee satisfaction and engagement, and as a powerful tool in the employee benefits package to attract and retain top-tier or unique talent.

AEB Strategic Design for benefits that work

While AEB works with the employer to review existing coverage each year, we also engage with individual employees to ensure that any plan options continue to meet their needs or should be considered for the next enrollment period. Indeed, anytime there are life changes, AEB and the individual employee should make necessary adjustments as allowed by law and policy rules during interim periods following such changes and the following open enrollment deadlines. Any disability coverage should definitely be reviewed annually and with life changes that might include a new job or promotion, salary change, marriage, a new baby, or even a change in debt such as moving from rent to home ownership.


Reference Sources¹

Cited references with some as direct quotes.

  1. Safeguard Your Life Plans against Disability – Koss Olinger.
  2. Why You Should Offer Short-Term Disability Coverage to Your Employees – Resourcing Edge.
  3. Short-Term Disability Mental Health – DisabilityProAdvice.com.
  4. New law gives New York City workers paid family leave for anyone they define as family – Proud Parenting. also quoted as cited above by Guardian Life as indicated above.
  5. Tap into the untapped market for short-term DI – Insurance News | InsuranceNewsNet. 
  6. Can I Purchase Short Term Disability Insurance – All Insurance FAQ. https://allinsurancefaq.com/can-i-purchase-short-term-disability-insurance-2/
  7. Why You Should Offer Short Term Disability Coverage to Your Employees – Resourcing Edge.
  8. About Us | Benefits Advisory Group and quoted as cited above by Metlife
  9. Accommodations in the Workplace – Laurie Adachi, Educational Psychologist, LEP #1847.
  10. Short-Term Disability Mental Health – DisabilityProAdvice.com.

Review the following relevant AEB content:

Other Posts in this series as they are published:

  • Disability Insurance Overview – Income Replacement Part 1
  • LTD (Long-Term Disability) Insurance – Income Replacement Part 3
  • Key Person Disability Insurance – Income Replacement Part 4
  • Overhead Expense Insurance – Income Replacement Part 5

¹Outbound links all open in a new browser window or tab

Data accuracy effective:  28 May 2024 (laws and statistics can change, and we will endeavor to update when they do)

AEB: BENEFITS THAT WORK