EBS BULL #2441 5/94 CHAPTER 3/ SM 1992 DISABILITY BENEFITS Chapter 3. Disability Benefits This chapter discusses three types of disability benefits: Sick leave, sickness and accident insurance, and long-term disability insurance. l Paid sick leave and sickness and accident insurance provide workers protection against loss of income during temporary absences from work due to illness or accident. l During more extended periods of disability, workers' income may be continued through long-term disability insurance plans. Short-term disability protection through sick leave, sickness and accident insurance, or both, was provided to three-fifths of all full-time employees in small establishments in 1992 (table 19). Sick leave usually provides 100 percent of the worker's normal earnings, whereas sickness and accident insurance usually replaces 50 to 67 percent of pay. Sick leave was provided to just over half the full-time employees and sickness and accident insurance to one-fourth. About an eighth of all employees had sick leave plans coordinated with sickness and accident insurance. Coordination can take two forms: Starting insurance benefits after sick leave pay has ended, or paying both benefits concurrently. When payments are made from both sources, sick leave pay is reduced by the amount of the insurance benefits so that the total benefit does not exceed full salary. Regardless of the method of coordination, employers offering sickness and accident insurance tended to allow fewer sick leave days than those without such insurance. At 5 years of service, for example, annual sick leave plans coordinated with insurance granted an average of 7.5 days at full pay. Plans not coordinated with insurance provided 9.9 days. Long-term disability insurance (LTD), which typically pays 60 percent of earnings, was provided to nearly one-fourth of the full-time employees in small establishments in 1992. LTD insurance payments usually begin after 3 or 6 months of disability and continue until retirement age or for a specified number of months, depending on the worker's age at the time of disability. Paid sick leave and LTD insurance were more prevalent among white-collar workers, while sickness and accident insurance was slightly more prevalent among blue-collar workers. Paid sick leave Of the employees covered by paid sick leave plans, four-fifths were allowed a fixed number of days per year (annual sick leave plans). The remainder were covered by either per disability benefits (benefits provided for each illness) or were provided sick leave on an "as needed" basis. Plans providing both an annual and per disability benefit were rare (tables 20- 25). Employees receiving annual plans averaged 7.7 days at 1 year, 9.1 days at 5 years, 10.9 days at 15 years, and 12.0 days at 25 years. About two-fifths of the employees covered by annual sick leave plans were allowed to carry over and accumulate unused sick leave from year to year (cumulative plans). Two-thirds of the employees in cumulative plans had limits on the amount of sick leave that could be carried over to the next year, typically between 10 and 100 days. The remaining workers in cumulative plans were allowed to accumulate an unlimited amount of sick leave. Workers were often not immediately eligible for sick leave benefits. Slightly over one- half of employees had to meet length of service requirements before qualifying for sick leave benefits. Three months was the most common length of service requirement. While sick leave is commonly thought of as replacing lost income while an employee is ill or injured, most workers could use their benefits for other reasons. For example, using sick leave to take care of a sick child or to take care of personal business were the most frequently observed provisions. Sickness and accident insurance Sickness and accident insurance plans covered one-fourth of full-time employees in small establishments, protecting them against income losses due to short-term disabilities. Two- thirds of the participants had their benefits fully paid by their employer. The remainder most often paid a percent of earnings, up to a specified maximum contribution1 (tables 26-28). Benefit payments under sickness and accident insurance plans were either a percent of employee earnings or a flat dollar amount. White-collar participants were more likely to be covered by plans with earnings-based formulas than were blue-collar participants. Under earnings-based formulas, the percent of earnings was usually fixed--typically 50 to 67 percent--although some plans varied the percent by length of service or length of disability. Four-fifths of the participants in earnings-based plans had a dollar limit on the amount of the weekly benefit. Blue-collar workers were the most frequent recipients of scheduled dollar benefits, which provided either a fixed weekly amount or weekly benefits that varied by earnings, service, or length of disability. All plans placed a fixed maximum on the number of weeks of coverage, commonly 26 weeks. Four-fifths of the employees with sickness and accident insurance were required to be on the job for a specified time before they were covered by the plan. This service requirement was typically 5 months or less. Sickness and accident insurance, unlike sick leave, usually requires a waiting period before benefits begin, most commonly 1 to 7 days. Waiting periods may be shortened or eliminated entirely for employees involved in an accident or hospitalized. The waiting period is effectively dropped when sickness and accident insurance is coordinated with sick leave, because insurance payments typically start after sick leave pay has ended. Workers in two States, New Jersey and New York, are covered by mandatory temporary disability insurance plans that are at least partially employer financed. Both of these State plans pay benefits based on a proportion of the worker's earnings for up to 26 weeks with a limit on the weekly benefit. The State of New York requires that employers provide 50 percent of earnings to a maximum of $170 per week. Similarly, the State of New Jersey mandates that employers provide temporary disability insurance of 67 percent of earnings to a maximum of $288 per week.2 The State of Hawaii also requires that employers provide a minimum level of temporary disability income protection--55 percent of earnings to a maximum of $291 per week for up to 26 weeks.3Long-term disability insurance Long-term disability insurance provides a monthly benefit to employees who, due to illness or injury, are unable to work for an extended period of time (tables 29-33). Generally, LTD benefit payments begin after 3 or 6 months of disability and continue until retirement age, or for a specified number of months, depending on the employee's age at time of disability. In most instances, the LTD payments take the form of a percent of predisability earnings. Of the full-time employees covered by the survey, 23 percent had LTD coverage; 17 percent of those employees with coverage were required to contribute towards the cost of their plan. Of those with jointly financed LTD plans, one-fourth could choose from various options under a "cafeteria plan," with employee contributions varying by the mix of benefits selected. (See chapter 7 for additional information on cafeteria plans.) Another third contributed a monthly amount per $100 of covered earnings, with the most common rate between 20 and 39 cents per $100 of coverage.4 The degree of participation varied widely among the employee groups, with white-collar workers more than three times as likely to have LTD insurance as blue-collar workers. However, some employees not covered under LTD insurance are eligible for an immediate disability pension through their retirement plan (see chapter 6). Service requirements were imposed upon one-half of the LTD participants before they were covered by their plan. About two-thirds of participants with service requirements had to work 1 to 3 months before becoming eligible for benefits. Long-term disability plans require a waiting period before benefits begin. About one- third of the full-time participants had to wait 3 months, and another two-fifths had to wait 6 months after the disability occurred before beginning to receive LTD payments. For some participants, LTD benefits commenced after sick leave and sickness and accident insurance benefits ended. About 9 out of 10 participants received their LTD benefit as a fixed percent of predisability earnings. The most common benefit was 60 percent of monthly pay. Most of these plans set a limit on maximum monthly payments. These maximums commonly ranged between $2,501 and $10,000; the average was $5,768. About one-third of the participants were in plans that imposed a maximum on all sources of disability income. Such ceilings affected benefits only if the amount payable from the LTD plan plus income from outside sources, such as rehabilitative employment and all Social Security payments, exceeded a specified percentage (most commonly 70 or 75 percent) of predisability earnings. Survivor benefits, payable to an eligible dependent upon the death of a disabled employee, were available in plans covering just over two-fifths of the LTD participants. These benefits usually took the form of a lump-sum payment (most often equal to three times the monthly LTD benefit) or a percent of the monthly LTD benefit paid for a fixed number of months (generally not more than 6 months). Plans that included coverage for disabilities due to mental illness covered about three- fourths of long-term disability plan participants. However, the majority of these had limits placed upon coverage. In most of these cases, benefits were provided for a specified period (usually 24 months) and then ceased unless the participant was institutionalized at the end of the limiting period. Notes: 1 The prevalence of such contribution formulas is influenced in large part by the mandatory sickness and accident insurance plans in New York and New Jersey, discussed later in this chapter. 2 Both States permit an employer to substitute a private plan for the State plan if the benefits provided are at least equivalent. In New York, many employers agree to pay the employee's share of plan costs. California and Rhode Island also have mandated temporary disability insurance plans, but these plans require no employer contribution and, thus, are not included in this survey. 3 For more information on short-term disability benefits, see Jerline Thompson, "Incidence and Type of Disability Insurance Benefits, 1988-90, Monthly Labor Review, July 1993, pp. 51-53. 4 Covered earnings are that portion of a worker's earnings to which the replacement rate formula is applied. For example, if an LTD plan pays 60 percent of earnings with a maximum monthly benefit of $3,000, covered earnings would be $5,000 ($3,000 is 60 percent of $5,000).