Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? An employer-sponsored program to provide disability insurance to employees who are disabled (unable to work) beyond period specified in plan Designed to supplement Social Security

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? 1.When employees need income if they experience long-term disability 2.Employer wants to choose –who will be covered –amounts of coverage – can vary across employees –terms and conditions of coverage

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Design Features: Eligibility Employer decides coverage Plans usually only cover full-time salaried employees Waiting period typically 3 to 12 months

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Design Features: Definition of Disability “Social Security” or “total and permanent” Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Design Features: Definition of Disability “Qualified for” definition Total and continuous inability of the employee to engage in any and every gainful occupation for which he or she is qualified or shall reasonably become qualified by reason of training, education, or experience. Common definition in long-term disability plans

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Design Features: Definition of Disability “Regular occupation” or “own occupation” Total and continuous inability of the employee to perform any and every duty of his or her regular occupation. Common definition in short-term disability plans

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Design Features: Definition of Disability Specific exclusions 1.Disabilities during periods when employee not under physician’s care 2.Disabilities caused by intentional self-inflicted injury 3.Disabilities beginning before the employee became eligible for plan coverage

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Design Features: Benefit Formulas 1.Long-term plans generally replace 50% to 70% of pre- disability income 2.can integrate benefits with other disability policies –Social Security and worker’s compensation or –qualified or nonqualified retirement plans or –other insurance or –other earnings

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Tax Implications 1.Employer contribution to disability income plans is tax deductible 2.Employee contribution to disability income plan is not tax deductible to employee 3.Employer payment of disability plan premiums is not taxable income to employee

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Tax Implications 4.Benefits from employer paid plan are taxable; when employee pays part of premium, tax is prorated 5.If employee “totally and permanently” disabled, a limited tax credit can reduce tax on disability 6.Disability insurance premiums paid by employer are not subject to FICA (Social Security) or FUTA (federal unemployment)

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Tax Implications 7.Disability benefits subject to federal income tax withholding if paid directly by employer 8.Disability benefits attributable to employer contributions are subject to Social Security taxes for a limited period (usually 6 months) at beginning of disability

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 ERISA Requirements Disability income is a welfare benefit plan under ERISA –written summary plan description –name plan administrator –formal written claims procedure –not subject to eligibility, vesting or funding requirements of ERISA

Long Term Disability Insurance Chapter 51 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Discussion Questions 1.Why would disability insurance be considered relatively more important than life insurance, especially for younger workers? 2.How can a disability plan be structured to give an employer a tax deduction for paying premiums and not tax benefits paid to employees?