Short and Long Term Disability Insurance

Disability insurance, both short- and long-term, is a valuable part of your overall financial plan.  It offers income protection for periods of serious illness or injury.  Many employers offer one or both of these benefits, often free or at very reasonable cost.  It is also possible to buy individual short and long term insurance – many companies offer these policies at competitive rates.

In this post, I give an overview of how these policies work and their interaction with other benefits and laws.  I specifically address short-term disability insurance for pregnancy and maternity leave, a common concern and use of the benefit.

Short Term Disability Insurance

What Is Short-Term Disability Insurance?

Short-term disability (STD) insurance is coverage that acts as income replacement while you are too ill or injured to work for an extended period of time.  Plans typically cover absences for three to six months, depending on the terms of the policy.

Filing A Claim

If you have short-term disability insurance through your employer, you might have to use any available sick leave before the STD kicks in.  You might also have the option of saving your sick leave and going straight to the disability pay.  The application and payment process will vary depending on how your employer has structured the benefit – whether you work with the insurance company, the Human Resources department, or some combination.

If you have an individual plan, you will probably be working directly with the claims department of the insurance company from which you’ve purchased the policy.

Regardless of how you have to file a claim, you must submit medical documentation that supports your claim that you cannot work.  The insurance company or your employer will often have the option of requesting a second medical opinion.

How Much Will STD Pay?

There is a lot of variation in the level of income replacement among short-term disability policies.  It can range from 60%-95% of your salary at the time of disability.  If you have a group benefit through your employer, you should be able to get this figure from your benefits staff.  If you purchase an individual short-term disability insurance policy, be very clear about how much coverage you are buying.

This brings up the issue of how much disability insurance will cost.  It’s hard to give a representative figure because there’s an incredible amount of variation depending on your location, profession, salary, age, and whether or not you have a group or individual policy.

The premiums for group plans should be clearly stated by your employer, are often based on your salary, and will be deducted from your paychecks.  For an individual plan, get multiple quotes since rates can vary a lot depending on the company, the level of the benefit, your profession, and what medical conditions are eligible under the policy.  Make sure you find out if the benefit is capped at a certain income level.

Some employers have what is called a self-insured STD plan, which means they pay any claims directly out of their own funds and don’t have an insurance policy.  In this situation, you will likely be paid through the normal payroll process.  Where an insurance policy is involved – whether individual or group – you will usually be paid by the insurance company.

Tax Treatment

Whether or not payments you receive under a short-term disability insurance policy are taxable income depends on how you paid the premiums, at least for federal taxes.

  • If you pay the premiums with before-tax dollars – or your employer pays the premiums – any benefits paid will be taxed.
  • If you pay the premiums with after-tax dollars, any benefits paid will not be taxed.

States and local governments can treat STD benefits differently than does the federal government.  For example, Pennsylvania does not tax any short-term disability benefits, and the city of Philadelphia exempts STD payments from the city’s wage tax.  Your employer or insurance company should have information about the taxability of your benefits.

Long Term Disability Insurance

 What Is Long Term Disability Insurance?

Like STD, long-term disability (LTD) insurance is coverage that provides income replacement in the event of serious illness or injury that prevents you from working.  LTD, however, is used when your recovery takes much longer or you are permanently disabled.  Benefits usually kick in within six to twelve months of the initial disability, depending on the terms of the policy.

Employment-Based Long-Term Disability Insurance

Many employers offer LTD and pay for the premiums.  In some situations, you can “buy up” the benefit, meaning the employer pays for a base level benefit, perhaps a 60% income replacement level, and the employee can pay for supplemental coverage that might add another seven to ten percentage points to the benefit.

Individual Policy

Like STD, you can also buy an individual policy on the open market from one of many different insurance companies.  Shop around.  You might be able to get discounts for buying multiple lines of insurance from the same company, so don’t hesitate to get a whole range of products quoted together, such as STD, LTD, life insurance, and auto and house insurance.

Benefit Levels and Filing Claims

By far the most common benefit levels for LTD insurance are 60% and 66% income replacement, and there’s often a cap on the income base that will be covered.  So high wage earners should examine the terms of their policy – group or individual – very carefully to make sure there’s no unpleasant surprises in the event of a claim.

When filing a long-term disability claim, you will, of course, have to provide medical documentation.  Don’t be surprised if it’s subject to more rigorous evaluation by the insurance company than for a short-term disability claim.  After all, the potential liability is much higher for the insurance company: if you’re 35 and found to be permanently disabled, they will have to pay out over 30 years of benefits.

Most plans will require you to also apply for Social Security Disability Insurance.  If approved, the LTD payments from the insurance company will almost definitely be offset by your Social Security benefit.

Laws Related To Disability Insurance

There are a number of laws at both the federal and state levels that affect disability insurance coverage.

State Laws

A number of U.S. states regulate disability insurance policies quite closely.  They set minimum standards and might control the premiums that insurance companies can charge.  A few, such as California and New Jersey, even have their own state short-term disability insurance programs.

These state disability programs are funded by employers.  Employers can choose to pay into the fund or can provide a private plan that at least matches the level of benefits offered by the state program.

Check with your state insurance board or your employer to find out what regulations affect disability insurance in your location.

Pregnancy and Maternity Leave

Under the Pregnancy Discrimination Act of 1978, pregnancy and maternity leave must be treated the same as any other disability for purposes of short-term disability benefits.  Bed rest, if medically indicated, is included.  Most states have guidelines that set how much disability you are entitled to after delivery.  Common time frames are

  • Vaginal delivery:  6 weeks
  • Caesarean delivery:  8 weeks

If you are eligible for Family and Medical Leave (FMLA), you will also have 12 weeks that will likely be administered concurrently with your disability.  Your employer can set policies about how much paid leave you can use in addition to the STD.

For example, the company might let you use sick leave during your FMLA period and then any accumulated vacation time for up to 6 months total.  Assuming you didn’t have any bed rest before delivery; had a vaginal delivery; and started with a leave balance of 35 days sick and 15 days vacation, your maternity leave might look like this:

  • Weeks 1 through 6:  Short-term disability payments; first 6 weeks of FMLA
  • Weeks 7 through 12:  Sick leave (30 days); remaining 6 weeks of FMLA
  • Weeks 13 through 15:  Vacation
  • Weeks 16 through your return to work:  Unpaid

If you are planning on getting pregnant, check with your benefits department to make sure you understand what types of leave are available to you.  There can be an enormous amount of variation by employer within the framework of the Pregnancy Discrimination Act, FMLA, and short-term disability insurance provisions.  Remember, in most states, employers are not required to have a short-term disability policy.

Conclusion

Disability insurance, particularly if you don’t have a very large emergency fund, can be an important part of your overall financial plan.  Whether you can get it through your employer or must buy it on the open market, think about how you would pay your living expenses should you fall seriously ill or get injured when making your decision about taking the coverage.

401(k) Contribution Limit For 2012

Every year the IRS decides whether or not to raise the annual contribution limit for 401(k) retirement plans. Its calculations are based on the official cost-of-living rates.  These limits also apply to other retirement savings plans such as 403(b)s.

You can set aside pre-tax money if your employer sponsors one of these retirement savings accounts, but the government caps how much each person can shelter from taxes.

For the first time since 2009, the IRS has raised the annual salary reduction limits on 401(k) and 403(b) plans. The catch-up amount for those aged 50 and over has stayed the same.

All annual contribution limits are applied on a calendar year basis. Any reference here to a 401(k) plan also applies to a 403(b) plan.

2012 Contribution Limit

The 401(k) contribution limit has been raised a total of $500 for 2012. You can take advantage of the additional age-50 contribution if you turn 50 by the end of calendar year 2012. You’re eligible for the extra contribution amount if you were born on December 31, 1962 or earlier.

Contact your benefits administrator if you want to maximize your contribution for 2012. Depending on how your employer administers the plan, you might have to complete a paper form or make your election online. You might also be limited to a certain number of changes per plan year. So make sure you understand the rules.

Year Under Age 50 Limit Age 50 and Over Limit Total for Age 50 and Over
2009, 2010, & 2011 $16,500 $5,500 $22,000
2012 $17,000 $5,500 $22,500

Additional Limitations

While the annual contribution limit can theoretically be as high as shown in the above chart, there are additional rules for 401(k) retirement savings plans that might lower the amounts. Intended to prevent higher paid employees from benefiting disproportionately from the tax savings associated with 401(k) contributions, these rules are applied based on the circumstances at each employer.

If a company sponsors a 401(k) retirement savings plan with a matching feature (e.g., the employer gives a contribution to the plan based how much the employee contributes), it must test its population every year. Based on the participation rates at different salary levels, the employer might be required to cap how much its highest paid employees can contribute.

If you are affected by these testing rules, your employer has likely already notified you. But if you are new to the plan – or had never contributed at a high rate before – double-check with the administrator of your retirement savings plan. Your 401(k) annual contribution limit might be lower than otherwise allowed.

What Is COBRA Health Insurance Coverage

What is COBRA?

People have often heard of COBRA health insurance coverage but aren’t really sure what it is or how it works. The term COBRA actually stands for Consolidated Omnibus Budget Reconciliation Act. It’s a title often applied to giant budget bills passed by Congress, generally appended by the appropriate year.

But when most of us use the phrase COBRA benefits we’re referring to a law passed in 1986 that gives employees and their dependents the right to continue their health insurance when they lose coverage under an employer-sponsored plan. People already recognized back in the 1980s that there are significant gaps in our health insurance system, and this law was an attempt to address one part of the problem.

The Department of Labor (DOL) regulates COBRA, setting the rules under which employers must administer COBRA health insurance coverage.

Eligibility

There’s two parts to figuring out if you can take advantage of the COBRA legislation. Is  your (former) employer subject to the law, and have you or your dependents experienced a qualifying event?

Employer Size

Small employers do not have to offer COBRA health insurance plans. Only employers that have 20 or more employees for more than 50 percent of the prior calendar year are subject to the rules. The DOL has good explanations of how to figure out if an employer is subject to COBRA on its web site.

The reasoning behind this exception is that people who elect COBRA tend to be heavier users of medical services than average. Small business health insurance premiums are more sensitive to large claims because they have a smaller pool available to absorb losses.

Your Status

There’s a whole list of situations that make you eligible to elect COBRA. By far the most common reason is that you left your job, either voluntarily or not. Generally, an employer would have to show you were fired for gross misconduct to deny you COBRA benefits. A layoff – or reduction in force – is a qualifying event.

Other events that would qualify you and/or your dependents for COBRA health insurance coverage include

  • Divorce. Your ex-spouse would be eligible.
  • Overage dependent. Your child reaches age 26 and can no longer stay on your plan.
  • Reduction in hours. You are no longer eligible for the employer-sponsored benefit plan.
  • Your death. Any dependents (spouse, children) covered under your insurance plan would be eligible.

There are several variations on each of the above categories, but these are the biggies.

The base period for which you can get COBRA coverage is 18 months. In some situations, such as death, the covered beneficiaries are eligible for up to 36 months.

Your employer is required to notify you and any covered dependents of your right to elect COBRA within 30 days of the triggering event – 44 days total if there is a third-party administrator involved. You have an obligation to notify your employer or plan administrator of a divorce, legal separation, or child ceasing to be covered under the plan within 60 days of the event.

You are entitled to 60 days to elect COBRA coverage.  Your first premium payment is due within 45 days of making your election.

Cost

One of the main complaints about and drawbacks to COBRA health insurance is the cost.

Your employer – or former employer – can charge you 102% of their premium cost for the plan coverage (the extra 2% is an administrative fee). Since most employers who sponsor health benefits cover at least part of the cost for active, eligible employees, the full price can give you sticker shock.

The cost structure might work something like this:

Coverage Total Premium Employer Subsidy Employee Cost COBRA Cost
Single $500 $400 $100 $510
Family $1,200 $800 $400 $1,224

Note that there’s no federal rules currently about what percentage of the health insurance premium an employer must subsidize for employees. I just picked the above numbers because they worked out neatly!

What Coverage Will I Get?

By law, health insurance coverage under COBRA must be the same as what the other plan participants (e.g., the active employees) get. You will be subject to any changes to the plan design, such as increases to co-pays, but you will also be able to change your election during Open Enrollment.

You can’t, however, add any dependents (except newborns) to your plan while on COBRA if they weren’t already covered when you lost coverage. Additionally, if the employer completely terminates the plan, you will lose your coverage the same as the active employees.

Why Should I Elect COBRA?

The obvious reason to pay the high cost of COBRA is that medical bills can be exponentially greater. If you or a dependent have a serious medical condition, the decision can be a no-brainer.

But a less obvious reason to elect COBRA is the issue of pre-existing condition clauses. While the Affordable Care Act (aka Healthcare Reform) has started to address this problem – insurance companies can no longer apply them to children under the age of 19, for example – they will not be fully eliminated until 2014.

If you get a new job and the employer’s insurance plan has a pre-existing condition clause, you will not be able to get insurance coverage for a medical condition if you sought treatment for that condition within the past few months prior to coming on the plan. You will be subject to a waiting period before your new insurance will pay anything related to any such pre-existing conditions.

One way around these clauses is if you have not had a break in your medical coverage of more than 63 days. Under a provision of the Health Insurance Portability and Accountability Act (HIPAA), you can get credit for your prior medical coverage that can potentially eliminate any waiting period in your new policy.

COBRA coverage counts under HIPAA in reducing or eliminating any waiting periods for pre-existing conditions. So electing COBRA can make strategic sense if you have a medical condition for which you must seek treatment before you are covered by a new plan.

Of course, so many of the factors involved can be unpredictable. And, often, you simply cannot afford the COBRA premiums.

Alternatives to COBRA Health Insurance

There are some sources for help out there, particularly for children, although they can be difficult to track down and resources are stretched. Most states have relatively cheap health insurance coverage for children through CHIP or Medicaid with information on their web sites. Adults may be eligible for assistance for certain conditions in some states.

See if you can go on your spouse/partner’s plan. If you notify their employer within 30 days, your losing coverage must be treated as a qualifying event that permits election changes.

The federal government has also established a portal at Healthcare.gov that has information about changes being introduced by healthcare reform as well as links to help you find alternative health insurance. You might be able to find a catastrophic plan that has more affordable premiums. These plans are designed to cover truly serious conditions, leaving you to pay more in out-of-pocket costs. But the premiums will likely be significantly lower than you will pay under COBRA health insurance coverage.