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What is it?

Learn about short-term disability benefits that provide income continuation for ill or injured employees, typically lasting under 6 months. Explore features, design, and tax implications of sick pay and short-term disability plans.

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What is it?

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  1. What is it? A plan that continues employee’s salary or wages for a limited time if the employee is ill or injured Usually lasts < 6 months

  2. When is it indicated? Realizing that employees will become ill or injured, employers typically provide sick pay for short absences from work Employer can discriminate and can choose • who will be covered • level of benefits (can vary among employees) • terms and conditions of coverage

  3. Design Features Two types of short-term coverage • sick pay • short term disability

  4. Design Features Sick pay • Uninsured continuation of salary or wages (usually 100% replacement) for a short period of time beginning first day of illness or injury • Usually cover broad class of employees but can favor certain groups • Usually for full-time employees

  5. Design Features Sick pay • Duration often tied to length of service • Plan may allow carryover of unused benefits with a cap on accumulation • Reduced benefits common with long benefit period • Must design carefully to avoid abuse

  6. Design Features Short-term disability • Fills gap between end of sick pay and beginning of long term disability • Plans often insured • As compared with long-term plan, short-term plans • have broader coverage • require less service for coverage • have a more generous definition of disability

  7. Tax Implications • Employer can deduct • payments to employees under sick pay or short term disability • premium payments under insured plan • Employees may share cost for insured plan • Employer paid premiums are tax-free to employee

  8. Tax Implications • Benefit payments taxable to employee proportional to premiums paid by employer • Disability credit available to employees totally and permanently disabled to reduce tax burden • Disability insurance payments paid by the employer are not considered wages and therefore not subject to FICA (Social Security) or FUTA (federal unemployment)

  9. Tax Implications • Disability benefits are subject to federal income tax withholding if paid directly to employer; if paid by 3rd party, withholding required only if employee requests • Disability benefits attributable to employer contributions are subject to Social Security taxes for limited time at beginning of disability

  10. ERISA Requirements Sick pay or a short-term disability income plan is a welfare benefit plan under ERISA Must have • written summary plan description • name of plan administrator • formal written claims procedure Not subject to rules regarding • eligibility • vesting • funding

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