Paid disability: What’s fair, what’s too much?
September 4, 2008 by Bill MeltzerPosted in: Compensation, Disability, In this week's e-newsletter, Latest News & Views
Any organization with short-term disability benefits walks a fine line. On the one hand, you want to help employees who are legitimately in need.
On the other, you can’t afford to open the firm’s wallet any wider than necessary. But is there a magic number for how much short-term leave to cover?
Yes, a new study says. The ideal salary-replacement percentage is 70%.
Not too much, not too little
At 70% coverage, beneficiaries have enough money coming in to tide them over, while still having an incentive to get back to work as soon as they’re ready. What happens if you cover more or less than 70%? The study finds:
- employees tend to return too fast (increasing the risk of long-term disability) as coverage dips below 70% of their income, and
- absenteeism costs (and disability premiums) go up significantly when the employer covers more than 70% of the worker’s income.
Financially speaking, nice guys finish last, according to the study.
The employees of firms that cover 100% of the person’s income stay out on short-term disability 20% longer than those offering 70% coverage.
Won’t your firm make up for the difference with increased loyalty and productivity? Not necessarily.
The increase in retention and productivity is small, and doesn’t add up to enough money to offset the added expense of covering someone’s entire income.
Meanwhile, employers that cover 50% or less of the employee’s income often wind up losing more money than they save. Productivity and retention rates drop, and too many folks come back before they’re ready. The result: Higher long-term costs.
Eight is great
For the same reasons, the ideal take-effect date for disability benefits is the eighth day of leave. If the benefits take effect too soon, people who are well enough to return to work have an incentive to milk the system.
But any later than eight days, and many of the folks in need avoid taking disability for financial reasons.
Tags: Paid disability
September 4th, 2008 at 1:47 pm
I found the logic to be quite interesting. We been selling group SDT & LTD for years, but usually recommend the the 1st day Accident and the 8th day Sickness. Supprisingly a number of groups would like to see longer waiting periods.
September 4th, 2008 at 1:51 pm
What about the the length of the coverage period? coverage for 13 weeks, coverage for 26 weeks?
September 4th, 2008 at 2:37 pm
My company has a tiered system: hourly employees are paid 66 2/3% after a one day “no pay day” to discourage employees from “taking advantage” for short term issues. The first 14 days are “sick leave” then on day 15, they move into a STD status (which requires application and coordination with a 3rd party TPA that handles all the dealing with the doctors office and obtains medical info – that we in HR don’t want to have access to). The pay for STD is the same as “sick leave”. There is a 6 month waiting period for sick leave and STD. For salaried non-exempt and exempt employees, the sick and STD is 100% pay from day one of the illness.
Even though abuse is certainly possible, I have not seen this to be the case. Most employees (in the industry I am in) are thrilled to death to have paid time at all and supporting them through difficult times breeds loyalty. Having the 3rd party administrator for illnesses/injuries longer than 2 weeks, REALLY helps because the TPA determine if an employee qualifies (not me) and deals with all the medical info so there isn’t an issue of “you know too much” when they come back.
September 4th, 2008 at 3:37 pm
YYou mention that a “a new study says. The ideal salary-replacement percentage is 70%.” Wat study is that so I can refer to it when I develop our plan
thnaks
Jim
September 4th, 2008 at 5:59 pm
I worked for a company in Columbus Ohio who really did things unethical and illegal. I’m no longer there so I can give details. They would pay those employees they liked STD or LTD and the ones (mostly black) were denied such monies. I saw this first hand when I was in data processing (typing microfilm jackets). The policy said it was to be tier plan like the way Jackie T explained but the “new owners” changed the name of the company and told us we are all “new employees” and therefore the tier system didn’t apply (but only for their favorite employees).
I tried NAACP and other agenicies and no one wanted to help me. I’m glad I’m no longer there.
September 5th, 2008 at 10:33 am
We’ve had a flat rate for STD for years. The same $150 a week no matter how much you make. I was able to convince my boss to increase it to $200 a week in 2006. We’re so far behind the times. We have high co-pays on our HMO and low payments on STD. After 13 weeks, they roll to LTD were they finally get 66%. I don’t know how much I can push for at renewal since I’ll be on STD in March (and I was out last time we did an increase…these babies have great timing!)
April 13th, 2009 at 9:48 am
My company is odd in that STD takes effect on day 8 and last for 12 weeks. LTD does not take effect until 6 months of disability. There is absolutely nothing for the employees during the three month gap. Anyone else?