How to Choose Your Company's Disability Insurance
Employees don't typically think about falling ill or getting hurt when not at work. But when they become unable to work due to an occurrence outside the workplace, they begin to worry. They are not covered by worker's compensation for non-work related injury or illness.
A company can offer short-term disability benefits that grant up to six months of coverage. They can also offer long-term disability benefits to cover the employee for the duration of their disability or until they hit retirement age.
Options for Disability Benefits
As an employer, you can choose from the following:
- The employer pays for short-term and long-term disability coverage
- The employee pays for long and short-term coverage
- Employer and employee share the cost of coverage
- Give your employees a choice of different types to accommodate their needs
How Your Employees' Taxes Will Be Affected
Choosing the right insurance for your employees is important. Each of your options has different effects on their taxes you should take into consideration as well.
If You Pay Premiums
If you pay 100% of the premiums for your employees, it is considered a benefit and is generally taxed as income. If the plan you choose pays a percentage of your employees' premiums, they will pay taxes on the remaining percentage. If 100% of the premiums are paid by your employees, the premiums are tax-free.
Section 125 Cafeteria Plans
An option for employees to make pre-tax or after-tax contributions can be made available. Cafeteria plans may include short-term and long-term disability plans along with group health insurance plans.
A Section 125 Cafeteria Plan is a benefit plan in which employers can create a pre-tax contribution account for employees, to be used for the benefit plans you are offering.
Taxes on Disability Income vs. Premium Costs
While most employees would prefer to have their employer pay the premium costs it may not be the case should they become disabled. Premium costs are generally minimal when compared to the costs of taxes on disability income.
Employer Paid vs. Employee Paid Example
Assume an employee makes $50,000 a year. They fall in a 30% tax bracket and have disability coverage paying 60% of their salary with a premium equal to 28 cents for every $100 of employee income.
- Pre-Disability Income: $50,000
- Taxes on Income: $15,000 (Federal, State, FICA: 30% in taxes)
- Net Pay: $35,000 per year (70% of net pay)
- Disability Benefit (60%) $30,000 per year
- Taxes: $9,000
- Net Benefit if Taxed: $21,000 (60% of former take-home pay)
- Disability Benefit (60%) $30,000 per year After-Tax
- Premium at $50,000: $140 per year ($50,000 x 0.28/$100)
- Net Benefit if Not Taxed: $21,000 (60% of former take-home pay)
The employee paid $9,000 in taxes on the benefit in the plan where the employer paid the premiums. When the employee paid the premiums, they paid taxes on the premiums but did not pay taxes on the benefit, which reduced their costs.
A comprehensive benefits package is worth considering offering your employees. These packages can offer necessary benefits for an employee to take time off from work to deal with illnesses or injuries.
Short-term and long-term disability plans for your employees can help you get your most valuable assets back to work, and inspire your employees by showing that you care. Giving them a choice of plans is one of the most solid options, but in the end, choosing plans comes down to what you can afford to offer.