Long Term Disability coverage is one of the most important benefits you provide your employees.  If an employee is unable to work due to an accident or illness, Long Term Disability Insurance provides the money to replace their lost income.  And if they are out on disability you know that every penny counts.

It’s important to understand exactly how your Group Long Term Disability contract is structured to offset with other income sources.  Too many times no one takes notice until an employee actually goes out on disability.

Disability Payment Offsets

As an employer, you want to make sure your employees are taken care of but you also don’t want your employee who is out on long term disability earning more money from their disability coverage than they were earning while actively at work.  What is the employees’ incentive to come back to work?  To avoid a situation such as this, most disability policies have provisions that reduce or offset the Long Term Disability (LTD) benefits being paid when an employee has other sources of income.  Below is a summary of the five most common offsets for total disability claims:

  • Social Security Disability Insurance (SSDI) If an employee manages to qualify for SSDI, their Long Term Disability (LTD) benefit will be reduced dollar for dollar back to the first day they were eligible for this award.  With a maximum monthly benefit of $2,663 in 2015, this can take a huge chunk out of an LTD payment.
  • Workers Compensation While workers compensation covers only work-related injury or illness, LTD provides 24-hour coverage.  LTD plans will directly offset for workers compensation payments.
  • Defined Benefit Plans This provision is one that many people are not aware that their contract could contain.  If an employee takes a distribution from a retirement or pension plan while collecting an LTD benefit, the employer funded portion of that retirement benefit might be an offset.  The employer funded portion could be the employer match on a 401K or the entire pension benefit if no employee contributions were involved.
  • Statutory Disability Plans Five states (California, Hawaii, New Jersey, New York and Rhode Island) and Puerto Rico have mandatory short term disability requirements.  LTD payments will be offset with these statutory plans.
  • Sick Pay/Salary Continuation Depending on the LTD contract, money paid to a claimant through sick pay or salary continuation might also be a direct offset to an LTD benefit.

Tips on How to Structure Your LTD Contracts to Manage These Offsets.

Even though the intent behind these offsets makes sense, if you’re the employee out on a claim, every dollar counts.  For this reason, here are a few different provisions that can minimize the impact of these benefit reductions:

  • 70% All Sources–If this provision is added to a contract, the offsets are applied to 70% of the employee’s pre-disability earnings rather than the traditional 60%.  Keep in mind, the employee will still be capped at their maximum monthly benefit.
  • Primary only SSDI offset–The typical “full family” SSDI offset reduces the LTD benefit for both employee and family awards.  Primary only offset strictly reduces the benefit for awards received by the employee.  This rider can make a big difference in the benefit paid, and usually doesn’t increase the cost of the contract that much to add to your policy.
  • Minimize salary continuation offset–Most carriers can change the salary continuation offset so that it only reduces the LTD payout when the sick pay plus the benefit exceeds 100% of pre-disability income.  You can also typically remove the offset entirely.  With a 90-180 day elimination period on LTD plans, this contract change is not a big risk to insurance carriers, so the pricing load is very small.

Remember that changes to your group LTD contract are much harder to make retroactively.  Contact any of the Broad Reach Benefits Team for a complete review of your current Long Term Disability contract.  A simple and quick analysis now can make a big difference later when an employee suffers a serious accident or illness.