Why employees should purchase LTD coverage
The number of employers offering fully paid health and welfare benefits is dwindling as healthcare costs rise. Offering employer-paid benefits is a way to attract and retain employees. However, workers may benefit more by paying the premium for one type of insurance: long-term disability.
Long-term disability is an important — but often overlooked — employee benefit. Most workers don’t think they’ll ever become disabled and need income replacement. Unfortunately, more than one in four 20-year-olds will become disabled before they reach retirement.
Long-term disability insurance picks up where short-term disability leaves off, typically after three to six months. It usually pays 50-60% of an employee’s salary until he or she can return to work. In some cases, long-term disability will pay an employee up to retirement.
Long-term disability insurance premiums are typically paid by the employer, or paid pre-tax by the employee through a Section 125 cafeteria plan. In this instance, employees must pay income tax on any benefit they collect, reducing their 50-60% payment even further when they likely need the money the most. It could leave them with just 40% of their typical income.
Instead, employers can opt for a long-term disability benefit tax choice option. With this option, employees can choose to pay for the premium with post-tax dollars and collect the benefit tax free if and when they make a claim. To compensate the employee for taking out taxes, employers can “gross up,” or raise, the salary to cover the cost of the premium. Or, employees can choose for their employers to continue paying the premium. Those employees will, in turn, pay taxes on the benefit if they ever need to file a claim.
Providing employees with an option to collect disability tax-free in the future is another way to attract and retain talent, but only if employees understand the benefit. Many employees —especially those on the younger side — may not give their long-term disability benefit a second thought, and they may be resistant to the idea of paying for coverage post-tax, especially after the employer used to cover the cost.
The solution? Plenty of employee education.
First, take this opportunity to educate employees on both short- and long-term disability benefits. Discuss real-life examples of people who claimed long-term disability to help put it in perspective for employees. Then, help them understand the tax choice option, why it may make sense to pay the premium, and what the financial impact is.
It may be helpful to create a calculator that illustrates the various financial scenarios: the difference between the employer-paid benefit and post-tax employee-paid benefit, as well as the difference in take-home pay if a worker is using disability benefits and paying income tax.
Giving employees the option to pay tax on a long-term disability benefit before they collect it or to pay disability premiums now can help a company appeal to a multi-generational workforce that may have different individual needs.