What happens when a health event causes your income stream to run dry?

By Fred Schott, Director of Operations, Council for Disability Awareness

If you’re one of the millions of working Americans currently making decisions about your employee benefits choices for the coming year, you’ve probably put most of your focus on the health-plan options, including what is or isn’t covered, which providers are or aren’t in-network, and how much will you have to pay out of your own pocket to satisfy the plan’s deductible and co-pay/co-insurance requirements.

And that makes sense. Health insurance is your employer’s highest-cost benefit (other than legally required benefits such as Social Security, Medicare, unemployment insurance, and workers’ compensation). It’s also the benefit that probably was most important to you when you were looking for a job and the one that has the biggest impact on your current job satisfaction.

One important thing health insurance doesn’t cover

But health insurance has one important shortcoming – it doesn’t make up for the income you’ll lose if a health event like an illness, injury, accident or pregnancy keeps you from temporarily (or permanently) being able to do your job.

You shouldn’t underestimate the likelihood of something happening to you. A recent study using data from the National Health Interview Survey estimated that just over 10 percent of the working-age population has a health problem that keeps them from working or limits the kind and amount of work they can do (in other words, a work disability). A different research study estimated that more than half of US household heads will self-report some kind of work disability between the ages of 25 and 60 (your prime working years).

Dealing with a six-week disability

So let’s say you broke your ankle after slipping on a patch of ice, or you broke your leg in a car accident, making you one of the 5.2 to 6.6 million people who experience a lower-limb fracture each year. Your job requires you to do a lot of standing, walking around, and carrying—and that means you won’t be able to work while you’re recovering. Your doctor says you can expect to be laid up for six weeks, which isn’t at all unusual.[i]

You’re going to lose six weeks’ worth of income—and your health plan doesn’t cover that. What will you do?

Protections available through Family Medical Leave Act (FMLA)

First of all, here’s a bit of good news: If you work for a firm that has at least 50 employees, and you’ve been working there for more than 1,250 hours over the past 12 months, you almost certainly are covered by the federal Family and Medical Leave Act. And — as long as you can get proper certification that your fracture qualifies as a “serious health condition”[ii] under the provisions of the Act — that means two things:

All your benefits will remain in force while you’re out (although you might still have to make any required premium payments), and
When you’re ready to go back to work, you should be able to return to your old job or one nearly identical to it.

See the US Department of Labor’s publication The Employee’s Guide to the Family and Medical Leave Act for more information on FMLA. Also, there are 11 states—including California, New Jersey, and Connecticut—that, along with the District of Columbia, have enacted their own FML acts that go beyond federal provisions. Check with your human resources contact to see what’s the case where you work.

But as helpful as FMLA is when it comes to giving you peace of mind about your benefits and job status while you’re recovering from a work disability, it doesn’t require your employer to pay you while you’re out. You’ll have to look elsewhere in your benefits ecosystem for an alternate income source to compensate for the one that’s run dry.

Paid sick leave: helpful, but limited

In recent years, a growing number of states and local jurisdictions enacted laws requiring paid sick leave. One of those laws may apply to your workplace. There’s variation regarding who’s covered, how much sick time employees are entitled to, when and how it can be used, and other legal fine points. (For more details on various paid sick leave laws, check out this comprehensive guide.)

Keep in mind a number of employers provide paid sick leave benefits even in the absence of a legal mandate. That number is expected to grow given the tax credit for employers providing paid family and medical leave that was included in the 2017 tax act. Your employer may be one of them.

But here’s something important to keep in mind about various paid sick leave provisions. Rarely, if ever, do they provide enough time to cover an all-too-common situation like your six weeks of recovery from a lower-limb fracture. In most cases, you’ll be able to count on a week’s worth of pay—or maybe two weeks, if you’ve been savvy about carrying over unused days from the previous year. What will you do for the rest of your time away from work?

Short-term disability: a useful benefit

At this point, you’ll need to press further into your benefits ecosystem to locate an income stream that will last longer than just a week or two. That’s where a short-term disability (or salary-continuation) plan becomes a helpful benefit.

Statutory disability

If you work in California, New York, New Jersey, Rhode Island, Hawaii, or Puerto Rico, you’ll have what’s known as statutory disability coverage. The purpose is to provide you with some income while you’re unable to work because of a qualifying disability. (Here’s a detailed matrix outlining provisions of these various statutory plans.) What they have in common is this:

They kick in only after you’ve been out for a certain period of time (usually a week). That time is usually referred to as the “elimination period.”
They’ll pay you for a limited period of time (“maximum payable period” or “maximum benefit period” or some other terminological variation)—typically six months, although in California, it goes up to a year.
You’ll get paid a percentage of your pre-disability income (usually ranges 50 percent to 70 percent) with a cap on the amount you get in any week. (California has the highest capped amount at $1,216. New York, on the other hand, caps at $170, and Puerto Rico’s maximum of $113 is even lower.)

In these statutory jurisdictions, employers can provide supplementary or “enriched” plans that provide additional benefits above and beyond what’s mandated by law. You may want to find out if that’s the case where you work.

Employer-provided short-term disability

What about other states, where the statutory requirement doesn’t apply? Employers may provide their own plans. They’ll usually do so in partnership with an insurance company. The insurer will usually take care of approving claims, processing payments, and they will often provide services to facilitate claimants’ safe and timely return to work. The employer can fully fund the plan’s cost or, in return for a premium payment, hand off the financial risk to the insurer.

As with statutory plans, you can expect that:

Coverage will kick in after an elimination period. Usually, that’s a week, but in many cases, it can be more (two weeks or, more rarely, 30 days). In some cases, it can be less (zero days, which means coverage starts the first day of your absence from work). I used to work for two different disability insurance carriers, and when I consulted with client companies, I noticed most of them also provided sick banks or general paid-time-off banks that employees were expected to tap to get them through the elimination period with an income stream.
You’ll be covered for a relatively short period of time—usually three or six months. I’ve noticed that employers in the education and healthcare industries tend to frequently have shorter periods of coverage. And there are some instances where coverage can go for up to a year. My experience is that most of the time, the maximum payable period for the short-term disability plan is set up to track with the elimination period for the employer’s long-term disability plan (if there is one).
You’ll probably be paid a benefit amount that’s less than 100 percent of your pre-disability pay. I’ve seen salary-continuation plans (basically, the same thing as short-term disability, except the money comes out of the payroll budget instead of a separate fund) that pay you 100 percent of your salary, if you have more than a certain number of years of service with the employer.

But those are the exception. The usual payment is 60 percent to 70 percent of salary (and sometimes lower). And, in addition to the “benefit rate,” there’s probably also a maximum weekly payment amount. So, the amount of weekly income you can expect from your employer’s short-term disability plan is actually going to be the lesser of your weekly pay times the benefit rate, or the maximum weekly payment amount.

Key questions to ask about your employer’s short-term disability plan

So, there are three key questions you should ask about your employer’s short-term disability plan:

How long do I have to be out of work before I can collect benefits?
Once I start receiving benefits, how long can I count on them before they’ll stop?
Given the benefit percent and maximum weekly payment amount, how much replacement income can I count on?

And now, let me add one more for you:

Who’s paying for the coverage—my employer or me?

Here’s why that’s important to know. If your employer is picking up the tab for the cost of disability coverage, any benefits you receive under the plan are taxable to you. But if you’re the one who’s paying, then your benefits come to you tax-free. That can make a big difference in the amount of money you actually bring in while you’re unable to work.

This distinction between taxable and non-taxable benefits also comes into play in what are called core/buy-up plans. This is where an employer offers a core benefit (let’s say, a benefit rate of 40 percent) at no cost, and the employee has an opportunity to purchase additional coverage (for example, to bring the benefit rate from 40 percent to 70 percent). In this situation, any benefits stemming from the core coverage are taxable, but the buy-up benefits are tax-free. (Keeping track of what is and isn’t taxable and making proper withholding is another valuable service that insurance companies provide.)

Now that I’ve given you four questions to ask about your employer’s short-term disability plan, I’ll give you a fifth and final one:

How do I sign up for the plan?

A lot of times—especially for plans where the employer pays the entire cost (including core coverage in core/buy-up situations)—you are automatically enrolled once you’ve met the criteria (usually involving hours worked and length of service) to become “benefits-eligible.”

But a growing number of employers are offering disability plans as an optional benefit. That means, you’ll have to make a specific benefits selection at the time of initial eligibility or at annual open enrollment to be covered. You’ll have to pay for the coverage (either with pre- or post-tax dollars), and you may have to answer some questions about your health and medical history (and those answers may affect your eligibility for the plan).

Bottom line: Find out what applies in your workplace.

Another way to get short-term disability coverage

You may also be able to get short-term disability coverage through an insurance company specializing in what’s sometimes referred to as worksite or voluntary coverage. In the past, these companies would send representatives to your workplace where they meet with you and, if you agreed to buy what they had to offer, enroll you for coverage. They still do that, but increasingly, you can interact with the company by using web-based technology. You can pay your premiums directly to the carrier or take advantage of arrangements the carrier made with your employer to allow for payroll deduction of premiums.

If you go this route, keep in mind because you’re paying for coverage with after-tax dollars, any benefits you receive will be tax-free.

What happens if you’re sidelined for a longer period?

Let’s say you’re one of the six million people with a work disability due to a back or neck problem. One out of every four people in your situation is likely to be out of work for more than three months (see Table 2 of this study). What if you’re in the top 25 percent?

That’s where long-term disability insurance becomes important. I’m not going to get into that topic here, because it merits in-depth consideration on its own, but you should at least check out what one of our guest bloggers has previously written about long-term disability coverage.

And, here’s something else to think about. When I worked for insurance carriers, the vast majority of employer clients had a policy of terminating people after they had been out of work due to disability for six months. Fortunately, in most cases, those terminated employees had long-term disability coverage. But, unfortunately, they no longer had health coverage through their employer (although they did have the option of COBRA coverage—an expensive option, and one that’s available for only 18 months after termination of employment).

My final words to you

If there’s just one thing you take away from what I’ve written here, I hope it’s this: If you become sick or injured (or leave work related to your pregnancy), your health insurance will help pay the medical bills. But if you’re unable to work because of an illness or injury, medical coverage won’t pay you. That’s why you need to become savvy about available resources—especially your employee benefits—that you can draw upon to provide replacement income. Remember that being out of work doesn’t have to mean out of money.

[i] You don’t just take my word for it. See the disability durations in Table 2 of this study. Also, check out the “Lost calendar days per closed claim, excluding pregnancy” metric on the short-term disability report in the Integrated Benefits Institute’s most recent set of health and productivity benchmarking reports.)

[ii] This is a good time to point out that the Family and Medical Leave Act addresses two different situations that might cause you to miss work: your own health, or a family member’s need for you to provide care for them. And that distinction pretty much applies to the various state and local leave laws (as well as individual employer policies and programs) relating to “family and medical leave” situations that have spring up over the past quarter-century. In this post, I’m addressing only leaves for “your own health.”

But understand that there’s often an interplay between the different leave types.

For example, if you’ve had a baby, the first six weeks after delivery are a period of medical recovery for you, so that time away from work would be considered as medical leave (your own health). But after that, you might need (and in fact be eligible for) additional parental or caregiving leave (for your newest family member). Be aware of your employer’s policies on this kind of leave (as well as any applicable state or local laws). And by the way, there’s a growing trend towards parental leave for the “secondary parent” (in most cases—but not always!—that means the father).

For a deeper dive on what kinds of family/medical leave programs are currently on offer, check out the first section of the Paid Leave Project’s Playbook resource.