Disability:
Myths, Risks, Protection & Taxes
Presented by:
Marissa Mayfield
Tycor Benefit Administrators, Inc.
November 15, 2012
Agenda
• Review common myths & misconceptions
• Discuss risks disabilities pose
• Review protection options available
• Discuss tax implications for disability claimants
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Disability Causes Harm
• To you as an individual:
– You rely on your own ability to earn an income to maintain your lifestyle
• To you as a spouse and/or parent:
– Your dependents rely on you for financial and emotional support
• To you as a Business Owner:
– Your effort directly impacts the success and viability of your business
• To you as an Employer:
– Employees rely on your efforts for their livelihoods
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WHAT IS YOUR MOST VALUABLE
ASSET?
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Myths
Top Myths & Misconceptions
• “Disability is not going to happen to me…”
• I’m healthy and careful; I don’t have anything to worry about…”
• If I do become disabled, it won’t last long…”
• I have enough savings and investments…”
• I am covered by worker’s compensation…”
• I have Social Security; that should be enough…”
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Test Your Knowledge
• The average Long Term Disability claim lasts about a year or
less. True or False?
• About what percentage of today’s 20 year olds do you think
will suffer a disability before they retire?
• Men are more likely than women to become disabled for 3
months or longer. True or False?
• What is the leading cause of disability in the US?
• Most workers today have discussed how they would handle a
loss of income due to disability during their financial planning?
True or False?
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Test Your Knowledge - Answers
• The average Long Term Disability claim lasts about a year or
less. False, the average LTD claim lasts 32.1 months
• About what percentage of today’s 20 year olds do you think will
suffer a disability before they retire? About 26%
• Men are more likely than women to become disabled for 3
months or longer. False
• What is the leading cause of disability in the US? Arthritis
• Most workers today have discussed how they would handle a loss
of income due to disability during their financial planning? False;
60% have never discussed loss of income due to disability
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Risks
What Used to Cause Death
Now Causes Disability
Source: Principal Financial Group
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Statistics
• One in eight workers will be disabled for five years or more
during their working years
• 61% of surveyed wage earners personally know someone who
has been disabled and unable to work for 3 months or longer
• Approximately 95% of disabilities are caused by illnesses rather
than accidents
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Statistics
• Medical problems contributed to 62% of all personal
bankruptcies filed in the US in 2007.
• 65% of working Americans say they could not cover normal
living expenses even for a year if their employment income was
lost; 38% could not pay their bills for more than 3 months
• 67% of US workers in the private sector have no long-term
disability insurance
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Protection
Disability Protection
• Mandated Insurance Benefits
– Worker’s Compensation
– Social Security Disability
– State Mandated STD Benefit
• Private Disability Insurance
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–
–
–
Individual Insurance
Keyman Insurance
Group Insurance
Voluntary Insurance
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Mandated Disability Protection
• Worker’s Compensation:
– 90% of disabilities are non-work related
– State Mandated Benefit
– Most employers required to purchase
– Provides protection for work-related injuries & illnesses
– Approximate benefit equal to 2/3 of worker’s wages to
maximum benefit
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Mandated Disability Protection
• Social Security Disability Insurance:
– Employer & Employee contribute to the “benefit pool” in the form of taxes
– Only severe claims expected to last 1+ years or that are terminal qualify
• A person must be unable to engage in “any substantial gainful work
which exists in the national economy”
– 65% of initial claims were denied in 2009
– With large backlog, claimants often wait 2-3 years to receive benefits
– In 2010, the average SSDI claim was $1,065/month; 97% of claimants
received a benefit less than $2,000/month
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Mandated Disability Protection
• State Mandated Short Term Disability Insurance:
– Closest state with mandate: New Jersey
– Other “Cash” states are NY, RI, HI, CA & Puerto Rico
• New Jersey Temporary Disability Benefit Law
– Provides “cash” benefits for non-work related disabilities
– Benefit caps at 2/3 of claimant’s income to $572 weekly max
– To qualify claimant must have at least 20 calendar weeks in
covered employment
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Private Disability Insurance:
Elements of a Disability Policy
1. Benefit Amount
•
•
All policies cap benefits at a set % of earnings
Typically 50%, 60% or 66.67%
2. Elimination Period
•
Claimants are required to meet a waiting period before claim payments
begin
3. Duration of Claim
•
Policies limit the duration a claim will be paid
4. Definition of Disability
•
Policies include set criteria the carrier uses to determine if a claimant is
disabled
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Private Disability Insurance:
Elements of a Disability Policy
5. Offsets
• Additional income sources and benefits a claimant receives may reduce
benefit received by carrier
• Examples: Work Comp Benefits, Sick Pay, SSDI, No Fault Motor Vehicle
Payments, PERS
6. Increases to Benefit
• While insured:
o Increases in coverage may be available as the insured’s salary increases
• While on Claim:
o Some policies include Cost of Living Adjustments that allow benefits
to increase over time
7. Partial Disabilities
• Payments made for partial disabilities when claimant returns to work on
limited basis
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Short Term Disability Insurance Defined
• Covers non-work related claims only
• Short waiting periods for benefits to begin
– Ex: 0 days, 7 days, 14 days, even 30 days
– Typically different waiting periods for accident and illness
• Waiting periods may be the same or different for these triggers
• When different, the waiting period for illness is longer than accident
• Limited claim durations
– Ex: 90 days, 180 days, 1 year, 2 years
• Claims have a defined “start & stop” time period
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Long Term Disability Insurance Defined
• Typically covers non-work and work related claims
– Carrier will reduce their claim amount by any worker’s compensation
benefit claimant receives for approved, work-related claim
• Long waiting periods for benefits to begin
– Ex: 90 days, 180 days, 1 year
– If claimant had STD & LTD benefits at disability onset, LTD waiting period
is often satisfied while claimant is on STD claim
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Long Term Disability Insurance Defined
• Longer claim durations
– Ex: 2 years, 5 years, to age 65, to Social Security Normal Retirement Age
• Social Security Disability Insurance application
– Carriers may require that claimants apply for SSDI
– For approved SSDI claimants: carrier reduces their claim payment by the
amount claimant receives from SSDI
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Individual Disability Protection
• Insurance protection purchased for an individual
• Typically Purchased By:
–
–
–
–
–
–
Professionals (Doctors, Attorneys, etc)
Business Owners
Businesses for Key Employees
High Wage Earners
Workers with specialized protection needs
Workers with no access to disability insurance through their employment
• Premiums may be level or may increase throughout the life of the
policy
• Typically purchased on a long term disability basis
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Key Man Disability Insurance
• Insurance protection purchased by a company on its “key”
employees (most commonly used with business partners)
• Protects business from loss due to a key employee’s inability to
work after a disability
• Policies are short term
– Elimination periods tend to be shorter (i.e. 30-90 days)
– Benefit duration typically 6-24 months
• Benefit amounts determined by key employee’s contribution to
company’s revenue, his/her income & estimated cost to replace
employee
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Disability Buy-Out Insurance
• Insurance protection purchased by a company on its owners
• Protects non-disabled owners from the cost of buying out the
disabled owner
• Allows for buy-out compensation to disabled owner in
consideration for loss of business interest
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Employer-Sponsored Disability Policies
• Employer pays for all or most of the insurance premiums
• Employer designs program
• Advantages:
– Guaranteed Issue Coverage- NO Medical Underwriting Requirements up
to certain limits
– Lower cost compared to Individual plans
– Bolsters employee benefit program by supporting recruiting/retention
– Liberal definitions of disability available
– Widely available in the market
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Which job would an employee rather have?
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Voluntary Disability Policies
• Employer “sponsors” program by providing employees access
to coverage
• Employees pay premium through payroll deductions
• Short Term & Long Term Protection available
• Premium costs often lower than purchasing individual policy
• Many programs include Guaranteed Issue coverage
• Portability/Conversion often available
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Taxes
Presented by
Marissa Mayfield
Tycor Benefit Administrators, Inc.
Taxability of Disability Benefits
Not all disability claims subject to taxes
•Applicable Taxes:
•Federal Income Tax (FIT)
•Social Security/Medicare Taxes (FICA)
•State Income Taxes
•Federal & State Unemployment Taxes (FUTA & SUTA)
•Local Income Taxes (where applicable)
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Taxability of a Disability Benefit
Type of Entity Matters When Company Pays Premium
• Disability benefits received by owners automatically tax-free:
–
–
–
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Partnerships
Limited Liability Companies
S-Corps (2% + Ownership)
Sole Proprietors
• Disability benefits received by owners are taxable:
– C-Corps
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Taxability of a Disability Benefit
All Premium Paid By Employer Or Employee:
NonTaxable
Benefit
Post-Tax
Premium
OR
Pre-Tax
Premium
Taxable
Benefit
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Taxability of a Disability Benefit
Premium Paid By Employer And Employee:
% of Premium paid Pre-Tax= % of Benefit Taxable
% of Premium paid Post-Tax= % of Benefit Non-Taxable
Employer
Pays 50%
Pre-Tax
Employee
Pays 50%
Post-Tax
50% Benefit
Taxable,
50% Benefit
Non-Taxable
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Taxability of Disability Benefits
•If a claimant’s benefits are taxable, benefits are subject to FICA
•FICA must be paid for the 1st 6 full months of a claim
oClock starts the 1st of the month following the last day worked.
•If at any point an employee returns to work and then goes out
again, the FICA clock starts again.
•Return To Work Disability Benefits
oClaimants that return to work on a limited basis and continues to
received reduced claim payments
oIf claim is subject to FICA taxes , claimant’s portion will be
withheld and employer will be responsible for match
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Taxability of a Disability Benefit
Gross-Up Arrangements
• Employer may “gross-up” employees’ pay to cover the cost of
disability premium
• Employer payroll deducts premium with after-tax dollars so that
disability benefit is tax free
• Insurance carriers often charge additional premium in an employer
uses a gross-up arrangement
• More Common on Long Term Disability Policies
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Taxability of a Disability Benefit
Reporting Requirements
• Insurers send periodic reports to employers (Monthly, Quarterly,
Annually, etc) outlining disability payments & taxes withheld
• Many carriers handle W-2 reporting responsibilities for STD &
LTD claims
• FICA Match:
– STD Claims- employer retains responsibility to report and pay their share of
FICA. Most carriers withhold & remit claimant’s share of FICA.
– LTD Claims- many carriers assume employer’s FICA match once employee
on LTD claim.
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References
• Social Security Publication: Disability Benefits
http://www.ssa.gov/pubs/10029.html/10029.pdf#a0=0
• An Employer’s Guide To Disability Income Insurance
http://www.assurantemployeebenefits.com/816/aebcom/xhtml_
clip/disabilityedu/employeesquide.pdf
• Council for Disability Awareness
• The Standard: Guide to Taxation of Employee Disability
Benefits
http://www.standard.com/eforms/8461.pdf
• MetLife:
http://whymetlife.com/adminmanual/pdfs/LM_Tax_on_Disabili
ty_2012.pdf
• http://www.keypersoninsurance.com/keyman_disability_insura
nce.php
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This presentation provided a short summary
of the risks of disability and protection
options available to
Individuals & Employers
Contact Tycor for Additional
Solutions & Information!
Marissa Mayfield
610-251-0670
mmayfield@tycorbenefit.com
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