The Short-Term Disability or Weekly Indemnity benefit is designed to compensate an employee for income lost as a result of short-term absences from work from an accident or sickness. Employers that provide a Short-Term Disability plan may opt out of the Employment Insurance Sickness Benefit and therefore qualify for a reduced E.I. premium rate. To be eligible to opt out, the STD plan must be at least equal to or better than the E.I. plan.
The main design features of a Short-Term Disability plan are described below.
One of the primary purposes of the elimination period for the STD benefit is to reduce administration costs for claims that are short in duration. Typically, STD plans provide coverage on the first day following an accident or hospitalization and the 8th or 15th day of absence as a result of sickness. However, the elimination period for accident or hospitalization could be as long as 15 days. A shorter elimination period results in a higher premium. During the elimination or qualifying period, most employees are covered through their employer's salary continuance plan (self-insured). These plans often provide a benefit that is linked to the employee's length of employment with the organization.
The benefit schedule is generally based on a percentage of the employee's pre-disability weekly gross earnings. When determining an appropriate benefit schedule, the tax status of the STD benefit must be considered. Unless the plan member is paying the entire STD premium, the benefit will be taxable when received. The STD benefit will also be non-taxable when the employer pays the premium on behalf of an employee, but the amount of the paid premium is treated as taxable income to the employee.
A STD plan which is taxable should be based on a higher percentage of the employee's pre-disability gross earnings than a plan that is non-taxable. A taxable LTD plan will often be based on a schedule as high as 75% of pre-disability gross earnings whereas a non-taxable plan will generally not exceed 67%.
There are two types of maximums that apply to a STD benefit: a non-evidence maximum and an overall benefit maximum. These maximums are determined by the size of the group, the volume of insurance and the nature of the business.
The non-evidence maximum (NEM) is the amount of insurance that the insurer will provide to employees without requiring medical evidence of good health. A high non-evidence maximum is therefore an important feature of the STD plan as it guarantees employees a minimum level of coverage (subject to eligibility based on income). Medical evidence is required for employees who qualify (based on income) for coverage in excess of the non-evidence maximum.
The overall maximum is the maximum amount of insurance that the insurer will provide under the terms of the contract.
The benefit period is the maximum amount of time for which STD benefits are payable. Common benefit periods are 15 weeks (to coincide with the E.I. Sickness Benefit period), 17 weeks and 26 weeks. The STD benefit period is generally integrated with the Long-Term Disability (LTD) benefit. For example, a STD plan with a benefit period of 17 weeks would usually be coordinated with a LTD plan with an elimination period of 17 weeks. An employee who suffers a long-term disability can therefore receive benefits seamlessly as eligibility for the STD benefit ends and eligibility for the LTD benefit begins.
To be eligible for Short-Term Disability benefits, generally the employee must be unable to perform the important duties of his/her own occupation and be under the personal care of a physician.
Employment Insurance Sickness Benefits take the position of "second payer" in many instances. In the case of group insurance benefits for sickness or loss of wages, the E.I. Sickness Benefit is reduced dollar for dollar. The E.I. benefit pays disability payments beginning on day 15 of the disability and continues for a maximum period of 15 weeks.
The STD benefit can be integrated with the E.I. benefit so that the E.I. benefit is "carved out". In other words, the STD benefit will pay benefits for the periods before and after the E.I. Sickness benefit (e.g. from day 1 to 14 and after the 15 week E.I. benefit period). Alternatively, the STD benefit can be "wrapped around" the E.I. benefit. Like the "carve-out" plan design described above, a "wrap around" plan pays benefits for the periods before and after the E.I. benefit. However, if E.I. declines to pay benefits for the 15 week period, a STD plan with a "wrap around" feature will pay benefits for that 15 week period as well (subject to satisfying the definition of disability). Both a "carve-out" and "wrap around" plan do not qualify for E.I. Premium Reduction because the E.I. benefit remains payable for 15 weeks.