An Employer's Guide to Short-Term Disability

Short-term disability (SD) isn’t high on employees’ list of favorite benefits. In fact, it’s not even on the list of the top 17 employer-sponsored benefits in a 2021 Glassdoor survey. Although SD can’t compete with healthcare coverage, flexible work hours, or more vacation time, it provides replacement income to employees who are unable to work because they’re injured, ill, or incapacitated.

SD could be a boost for SMBs and employees

Employees’ benefit “faves” shouldn’t keep your small business (SMB) from offering SD coverage. Here’s why:

1. Removing employees’ fear of being ill and temporarily out of work without a paycheck can raise productivity by reducing their stress.
2. Offering SD could give your business a hiring advantage. A benefit that pays employees while they’re out on medical leave can be a powerful hiring and retention tool for SMBs competing for talent.

If you’re already offering SD to your employees or aren’t yet convinced that you should, the question and answer (Q&A) segment below forms a complete guide to understanding how the benefit works.

What is short-term disability?

Short-term disability (SD) is temporary insurance coverage that pays a portion of employees’ income when a non-work-related injury, illness, or other physical or mental incapacity keeps them off the job.

Short-term disability (SD) is temporary insurance coverage that pays a portion of employees’ income when a non-work-related injury, illness, or other physical or mental incapacity keeps them off the job. The Employee Retirement Income Security Act (ERISA), under the United States Department of Labor, governs most employer-sponsored short- and long-term disability plans. This federal law sets minimum standards for health and retirement plans that protect employees as plan participants. Employers must understand ERISA’s provision to make sure their disability plans comply with the law. Disability plans generally have exclusions and restrictions, such as:

• A waiting period before a pre-existing condition is covered.
• Limitations on birth and delivery coverage unless serious complications occur.
• No coverage for self-inflicted injuries.

What medical conditions qualify as a “disability”?

Any illness, injury, or other incapacity that temporarily keeps employees off the job may qualify as a “disability” under the terms of an SD policy. The Centers for Disease Control and Prevention (CDC) define a disability as any condition of the mind or body that makes it difficult to do some activities. These conditions may affect a person’s:

• • Vision
  • Movement
  • Thinking
  • Remembering
  • Learning
  • Communicating
  • Hearing
  • Mental health
  • Social relationships

How much time off does SD allow?

The benefit typically covers employees who are off the job for fewer than 6 months. But coverage can be as long as 6 months to a year or even longer, depending on the SD policy and the employee’s medical condition.

What percentage of employees’ earnings does SD replace?

The usual amount is between 50% and 60% but, but can vary depending on the plan.

How is long-term disability different from SD?

The basic difference is, as both names imply, the amount of time employees are off the job. Medical leave for long-term disability typically is calculated in years — 5, 10, 15, or more — and can last up until an employee’s retirement. Also, long-term disability usually replaces from 40% to as much as 80% of employees’ pay.

Why offer SD when the FMLA also allows employees time off for medical reasons?

The Family Medical Leave Act (FMLA) is a federal law that requires all public employers and private companies with 50 or more employees to allow eligible workers 12 weeks of unpaid leave in a calendar year. While the law doesn’t pay employees who are on leave, it gives them time off to:

• Care for a family member with a serious medical condition.
• Give birth or care for a newborn.
• Adopt a child or become a guardian to a foster child.
• Recuperate from a serious health condition that keeps them from working.

To qualify for FMLA, employees must have worked at least 12 months and accumulated 1,250 work hours before leave begins. Both SD and FMLA protect workers’ jobs while they’re on leave — you can’t fire workers solely for taking time off for medical reasons. But FMLA doesn’t replace lost wages. When medical leave under FMLA expires, employees may be eligible for additional time off under an SD plan.

How do sick time and workers’ compensation coincide with SD?

SD differs from other types of medical leave because it covers only “non-work-related” illnesses and injuries. Workers’ compensation (WC), for instance, pays the wages and medical costs of employees who become ill or injured on the job. Either states or employers provide WC coverage. Employers may offer paid sick time and disability benefits in tandem, so that when one benefit ends, the other may kick in, if necessary. SD plans may require employees to be off the job for a certain number of days before they can file a benefit claim. This requirement, known as an “elimination period,” discourages employees from filing for SD when using sick days is a more practical option.

SD differs from other types of medical leave because it covers only “non-work-related” illnesses and injuries. Workers’ compensation (WC), for instance, pays the wages and medical costs of employees who become ill or injured on the job.

Will employees use SD if my company offers it?

Based on reports from the Council of Disability Awareness (CDA), workers need SD but don’t have enough disability coverage or savings should they become temporarily disabled and unable to work. The CDA points out that about 5% of U.S. workers will become disabled in the short term while employed due to illness, injury, or pregnancy. It also reports that 1/4 of today’s 20-year-olds can expect to experience a disability at some point during their career, up until their retirement. The organization adds that inadequate household emergency savings, spiraling healthcare costs, and fewer employers offering SD policies put American workers and their families at risk should they become disabled.

How are employees most likely to use SD?

The CDA cites employees’ top 5 reasons for using SD as:

1. 1. Pregnancy (22.3%)
   2. Musculoskeletal disorders of the back, spine, hips, knees, shoulders, and other body parts (18.5%)
   3. Injuries, including sprains, fractures, and muscular and ligament strains (11.4%)
   4. Gastritis, hernias, and other digestive disorders (7.4%)
   5. Mental health such as anxiety and depression (7.3%)

How can employers offer SD coverage?

Employers can offer coverage through:

1. Self-funding (fully or partially) and administering a plan, or
2. Selecting and paying an insurance company to administer the plan.

Employees may choose to buy private SD insurance if you don’t offer it.

Is SD mandatory?

Not in all states or jurisdictions. Currently, only 5 states mandate SD: Rhode Island, New Jersey, New York, California, and Hawaii. Puerto Rico also requires SD coverage. Employers offering SD plans in these jurisdictions must follow state laws and program requirements on coverage, contribution levels, enrollee eligibility, and employee approval. Mandates apply whether employers use their own or their state’s plan or purchase a private plan from an insurer.

What information must employees submit to qualify and file a claim for SD?

Employees must submit documented proof of their medical condition and inability to work from a physician. Plan administrators, employers, or insurers have submission forms for filing claims. They review the forms and employees’ medical records to decide whether to approve or deny a claim. Submission forms may vary by plan, but typically include:

• Employees’ contact information, job duties and pay
• Injury, illness and other medical details
• Physician’s statement
• Employer’s statement

Does SD cover employees who become ill with COVID-19?

SD eligibility depends on a plan’s definition of “disability,” according to Ogletree Deakins, a global labor and employment law firm. Employers are using a broad definition of “disability,” amending their SD policies or lifting the “waiting” or “elimination” periods to accommodate workers with COVID-19, the law firm reports. If you fully fund your SD plan, Ogletree Deakins recommends vetting any changes with your insurance company beforehand, If you use a third-party administrator, the firm recommends that you make sure plan changes can cover employees with COVID-19. All plan changes must comply with ERISA.

Announcing your SD plan

For any benefit plan you offer, the goal is to get employees’ buy-in. That’s why a company-wide announcement about your SD plan is vital. The announcement should describe in detail:

1. What SD is
2. Your plan’s requirements and restrictions
3. Who’s eligible for coverage
4. How to file a claim
5. Any tax liability on employees; income

Don’t forget to promote the plan year-round — not just during open enrollment.