Disability Insurance in Mid-Sized Companies

In a prior post, I shared the all-too-common dilemma of business owners with a now-disabled employee and no disability insurance or company policy on disability: Disability Insurance -- CEBI Member Feedback

This was such a meaningful response, I thought I'd share it as its own post. It's from a long-time friend of Chief Executive Boards International, John Robie, of Benefit Plan Alternatives. Here's what John had to say:

"In our practice we have this issue come up frequently. No one seems to make the decision on company policies...employment policies (not insurance policies) until they are faced with the dilemma of an employee being off work. The decision they make is frequently made based on the personality of the disabled person..."we like this person", or "this is someone that we'd like to get rid of." Hence the past practices policy begins to form.

"If the disabled is a key employee or someone that is liked, there is an inclination to continue their wage. It might be a bit of a burden but after all...the disabled person is important and "liked". Two things usually happen. Most often, they return to work and all is well until the next time someone is disabled. Or, the person isn't coming back and the gut wrenching decision of when to stop the paycheck has to be made. Many business owner crumble when faced with telling the spouse of a disabled employee that they can no longer continue wages to the family...,contrary to popular belief, many tough business owners are softies in disguise.

"The offshoot of the first thing happening...returning to work and all is well...is that the next employee to become disabled is the guy that you were ready to fire for incompetence. Now what do you do? You have set the stage to continue his wages since you established your ad hoc/past practices disability policy that says you will continue wages to disabled employees. After all you continued wages for the guy you "liked" so now all employees will expect similar treatment. You think employees don't know you did that but they do...everyone knows...you just think they don't. You tell Mr. Incompetent that his wages are done and the first thing he does is go to the lawyer. Not just any lawyer, but the one on the back of the telephone directory. How do you think this is going to work out? Oh, I forgot to mention, Mr.. Incompetent was in a drunken car accident , is a quadriplegic and will never return to work. Since you continued to pay the pervious disabled employee until his disability ended, Mr. Incompetent expects his wage to continue until he is better...he thinks he will get better with the right medical care. (Read that sentence as CATASTROPHIC CLAIMS ON YOUR INSURANCE EXPERIENCE AND THE RATE INCREASES THAT FOLLOW).

"Our recommendation always is to make decisions about disability wages before the fact, before personalities cloud the decision and when cool business-focused heads can prevail. From there, decide what the business can afford in the way of insurance. We mostly recommend insuring the catastrophe (long term disability) and self-insuring the nuisance (short term disability). If funds are an issue, I would suggest Long Term Disability coverage with a 90 or 180 day waiting period and communicate to employees exactly what they can expect if they become disabled. Many clients then will offer a Voluntary Short Term Disability plan (fully paid by employees) to the group. Employees that feel the need will cover their risk with the voluntary plan. Employees that can go 90 or 180 days without a paycheck (until the LTD begins to pay) do not buy the voluntary plan. Everyone makes the appropriate decision for their needs with a full understanding of what to expect from the company. No guilt, no hard feelings, no tough decisions. This kind of fore thought to the issue really takes the monkey off the back of the business owner.

"The issue that comes up even more frequently is when to terminate disabled employees or laid off employees from the medical plan. That is another issue that is best decided now rather than in the heat of the moment. A little proactive planning would make life so much easier."

Thanks, John, for this excellent "how-to" on the subject of disability insurance in mid-sized companies.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Disability Insurance -- CEBI Member Feedback

Within the past 3 weeks, three different Chief Executive Boards International members have asked their fellow members for a suggestion on how to handle the same thing -- an employee (generally long-term) who is currently on sick leave, and not likely to be able to return to work.

This is a real ethical, emotional and financial dilemma. One thing members are curious about is "what's the standard?" for most companies, and "what's right?" In polling CEBI members and mid-sized companies in general, the standards shake out like this:

1. In general, more mature (>10 years in business) and larger companies have Short-Term Disability insurance (STD), generally effective after 1 week's missed work. They also have Long-Term Disability (LTD) insurance, effective at either 90 or 180 days. This coverage goes hand-in-hand with a clear-cut Company Policy that specifies when an employee moves from Sick Leave to STD and then to LTD.
   
2. In general, less mature and smaller companies have no standard disability insurance at all. Unfortunately, most of these companies have no Company Policy on Disability, hence the quandry about how to deal with the question once it arises.
   
3. For those companies who want to do something about disability coverage, the first move is generally to add Long-Term coverage, which is far less expensive than Short-Term, due to the reduced likelihood of its being used.
   

Regardless of where your company falls in this spectrum, one thing you can do today is write a company policy on Disability. Remember, you don't need a major Employee Manual effort to get this done. All you need is a policy statement, similar to what you might have for sick leave or personal leave, that spells out what you will and won't do in the case of a disabled employee. You will, of course, as you probably do now, want to hand a hard copy of those policies to new employees, including a cover letter enumerating same, and requiring their signature to acknowledge they've received them.

If you're not ready to add the expense of company-paid disability insurance, you might also consider (I did this once in my own company) calling an agent, and asking him to write individual quotes for all your employees, for at least LTD and perhaps also STD. At that point you've at least done your part -- advised them of how long you'll carry them on sick leave, and offered them an easy option by which to cover themselves with almost no effort. Should they decline, when it happens that one of them becomes disabled, you'll at least be able to feel that you did your part.

There are variations in Disability Coverage. The "gold standard" of disabilty coverage is 60% of the employee's base salary. A huge consideration is "own occupation" -- will the person be covered if he can't do what he's been doing, or only if he can't do anything at all? Longer waiting periods, of course, are less costly. One cost-saving variation is to offer a "standard" (company-paid) LTD policy capped at a fixed benefit amount -- say, $2,500/month, with an option offered in the 125 ("Cafeteria") Plan to step that up to the full 60% at the employee's expense.

Important note: Remember that if the company pays the premiums, any future disability benefit payments are taxable to the employee as ordinary income. If, on the other hand, the premiums are deducted from the employee's pay after tax, any future disability benefit payments are tax free, since it's insurance the employee paid for with after-tax dollars. You stretch the value of the benefit a long way by making sure it's an after-tax deduction on the payroll, rather than company-paid.

I hope these thoughts are of some value to you. If you have or know of companies that have Disability coverage substantially different from any of these predominant styles, please click "comment" below and let us know what that is.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917