Why advisers must make the vital connection between paid leave and short-term disability

Personal time off. Sick leave. Short-term disability.

With everything else on an HR manager’s plate, they may not think about how these programs work together. And more to the point, why it matters.

They say you get what you pay for, but businesses may be paying for too much coverage, or not enough. And either way, the outcome may not be what they are banking on – for the company or its employees.

Scott Eells/Bloomberg

In a word, it can be complex. So let’s boil it down.

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Making the important connection between paid leave and short-term disability is a step that’s often overlooked. The result can be an overlap or a gap in coverage.

If there’s an overlap, employers may be paying more than necessary to provide comprehensive coverage. On the flip side, when there’s a gap, employees may lose income they rely on to pay day-to-day living expenses.

Asking the right questions
How do you make sure your clients’ paid leave programs and short-term disability benefit work well with each other to avoid the overlaps and gaps? Start by stepping back and taking a look at the programs together.

Consider their answers to these questions:

• What are your goals and objectives for your paid time off programs?
• If it’s a PTO plan, how much PTO do you expect employees to use before short-term disability kicks in, if any?
• Do you want sick pay to be coordinated with your short-term disability benefits?
• For sick pay plans, are your employees expected to exhaust all of their sick leave before the short-term disability kicks in, or just a set number of days?
  

The answers to these questions will help adviser and clients create a short-term disability benefit that complements paid leave programs.
When working with clients, advisers should consider these important factors:

1) When benefits begin. If an employer offers PTO, they likely expect employees to use some of it before short-term disability benefits kick in, but probably not all of it. If they offer sick leave instead of PTO, they may want employees to use it all before benefits begin. How employers want this to work will determine how long employees must be disabled before the short-term disability pays a benefit.

For example, let’s say an employer wants employees to use five days of PTO or sick leave before being eligible for their short-term disability benefits. In this case, the ideal elimination period – the time before benefits kick in – would start benefit payments on the eighth day for accident and sickness. That’s five working days of PTO or sick leave, plus two days for the weekend.

So, an employee who is out of the office for a short-term disability beginning on a Wednesday would take three days of PTO or sick leave the first week (Wednesday, Thursday, Friday) and two days the following week (Monday, Tuesday). Short-term disability benefits would begin the next Wednesday – the eighth day.

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2) Income from other sources. Income received from other sources, such as PTO and sick pay, may reduce or be deducted from an employee’s short-term disability benefit. This is referred to as an offset. If the goal is to allow employees to use accumulated PTO or sick leave to get their pay back to 100%, the disability policy should be set up so that it doesn’t offset. If the policy is not set up this way, money employees receive from their PTO or sick leave benefit will reduce the short-term disability benefit.

Let’s say an employer offers a 60% short-term disability benefit up to $600 and wants employees to have the option to use PTO/sick leave so they can receive 100% of their pay while they’re out on disability. Here’s an example:

Abby is out on short-term disability. Her income is $1,000 per week, so her short-term disability benefit is $600 (60% of $1,000). She chooses to use PTO/sick leave to cover the 40% of her pay ($400) not covered by the short-term disability benefit.

If the goal is to allow employees to use PTO or sick leave to get their income up to 100% during a short-term disability, it’s important to ensure the short-term disability coverage does not offset with income from other sources. If it does, the employee may not benefit from using their PTO or sick leave.

The key to creating a comprehensive leave program that works for your clients and their employees is to ensure paid leave coordinates with disability benefits. Follow these steps:

• Make sure they have a vision for how they want paid leave programs to work.
• Review paid leave programs and short-term disability benefits to make sure they’re working as expected.