The employer providing a disability benefit can control STD costs in a number of ways.
Summarizing the design factors that control STD costs:
- The shorter the benefit waiting period, the more expensive the plan.
- The shorter the total benefit period, the less expensive the plan
- The higher the benefit percentage, the more expensive the plan, and
- The higher the maximum income benefit, the more expensive the plan.
Be sure to read to the bottom of the section because we suggest a strategy that combines a whole bunch of techniques to come up with a win-win way to control STD costs but make employees happy.
Benefit Wating Period
The benefits waiting period, called the "elimination period" by most carriers, is a significant way to reduce STD premiums of as part of your overall disability plan. By making the employee wait one week, two weeks, or thirty days you can control STD costs.
How dramatic can the savings be? Well, in a recent study, one of our clients found that rates for an 8/8/13 plan (one week wait for benefits) were about 10% cheaper than the 1/8/13 plan (zero wait for accident benefits, one week wait for illness benefits).
If the benefit start date was extended so that it began after two weeks (14/14/11), the cost dropped 26% compared with the 1/8/13.
There are two factors working to reduce STD premium here.
- First, most disabilities are short-term in nature. It's more likely to have a ten-day absence than it is a ten-week absence.
- Therefore, if you wait longer, some of the disabilties will be over before the benefit period starts.. zero cost to the carrier -- and a lower premium for you.
- Also, the total plan period is always thirteen weeks (or 26 if that's the period you've chosen), so with a one-week elimination period, only 12 weeks' benefits are paid; with a two week wait, the total benefits paid drop to 11 weeks.
That's perhaps the least painful way to control STD costs.
Remember up above we said that short illnesses outnumber long, so adding 13 weeks onto a 13 week play may double the duration but not the risk.
While 16% of Americans (one in six) will suffer a disability of one week or longer in a given year, only about a third of individuals aged 25-55 will suffer a disability lasting longer than 90 days -- between now and age 65!.
That's still a lot of people, but one-third over 10, 20 or even 40 years is pretty small compared to one-sixth per year.
So extending your benefit period from 13 weeks to 26 isn't all that expensive. Another of our clients found that the rates only increased by 29% when the benefit period was doubled from thirteen weeks to twenty-six.
And if you extend to 26 weeks, that will carry you to the time when a disabled employee can apply for Social Security -- reducing your need for Long Term protection, particularly for line workers.
So even though it doesn't control STD costs, extending the benefit does favorably impact the overall cost of disability protection.
Disability Benefit Percentage
Lowering the benefit percentage will help you control STD costs.
Obviously, you'll pay less benefit, so the premium ought to be lower. A person making $600 a week will only get $300 benefit at 50% vs $360 at 60% and $420 at 70% (the three most common percentages).
Looked at as a percentage reduction in payout, dropping from a 60% benefit to 50% represents a 16.7% reduction in payout.
But it does something else, too. It gives the disabled employee more of an incentive to return to work. It's tougher to lounge around the house on 50% of pay than it is to do so on 60%.
Therefore, the carrier anticipates a speedier return to work, i.e, an effective reduction in benefit payout period. So the carrier will drop the rates by more than 16.7% when you drop the benefit percentage.
Maximum Benefit Amount
You can also lower the maximum benefit paid. Instead of making the maximum benefit $1,000 per week, make it $600.
When you do, two things go to work for you.
First, less of your payroll is covered -- the highest wage earners are uninsured for any income above the threshold. Premium rates are expressed as a price-per-weekly-benefit, so by lowering the benefit, you'll reduce the premium.
Second, the highest paid employees are often the oldest and the most likely to be disabled. By cutting off income at a lower threshold, the group has a younger profile, and the rate drops.
To illustrate, imagine a group of two people -- a 25-year-old making $600/week and a 50-year-old making $1,200 a week. If the benefit is 50% (to keep the math simple) to a maximum of $600 of weekly benefit, the 25-year-old will be eligible for $300 a week and the 50-year-old $600.
To illustrate how changes make a big difference, I'll invent a benchmark called "benefit years," which is the amount of dollars received times the benefit amount. For our hypothetical group, the numbers look like this:
Age 25 times $300 benefit = 7,500 "benefit years" Age 50 times $600 benefit - 30,000 "benefit years" Total = 37,500 "benefit years" and $900 of total benefit.
To get the average, take the 37,500 benefit years and divide by the $900 of total benefit, and you get an effective average age of 41.67 years.
Now, let's assume you make the maximum benefit $300 because the 50-year-old owns the company and can presumably afford to live without subsidy for a longer time. Now our calculation looks like this:
Age 25 times $300 benefit = 7,500 "benefit years" Age 50 times $300 benefit - 15,000 "benefit years" Total = 22,500 "benefit years" and $600 of total benefit.
To determine the average age here, take the 22,500 "benefit years" and divide by the $600 of total benefits, and you get an effective age of 37.5 years.
So the total benefits payable dropped by a third (from $900 to $600) and the age dropped by about 10% (37.5 compared to 41.67. So you would have saved money two ways -- a great way to control STD costs.
Employees can also share in the cost.
Obviously, that will control STD costs for the employer by passing them directly on to the employee.
But it's not just another egregious example of employers taking advantage of employees: there's a benefit to the employees, too.
If an employee pays for disability benefits with her own salary (on an after-tax basis) the benefit, when received, is income tax free.
So by having the employee pay for a share of the plan (usually only a dollar or two per week), the 60% benefit comes very close to matching the employee's take home pay -- the average employee is probably in something like a 30% tax bracket, at least in Massachusetts, so they're only taking home 70 cents on the payroll dollar.
There is an offset to the employer, however.
Remember up above I said that with a lower benefit percentage, carriers expect the employee to return to work sooner and give a resulting discount?
Well, just the opposite happens here. When the employee is keeping all or most of the benefit because it's tax-free, the carrier anticipates a greater tendency for the employee to take his time nursing himself back to health. So there's an increase in the rate to reflect that.
Generally speaking, however, the increase in premium rates doesn't offset the reduction achieved by passing premiums on to the employees.
Really Cool Master Strategy for Minimizing STD Costs
OK, so now you're down to the bottom -- design time! Let's assume you want to control STD costs and you currently offer the typical non-contributory 1/8/13 plan with 60% to $1,000 a week benefit plan.
Instead, whip together a plan that looks like this:
- Employees pay a share of the premium
- Benefit start date is pushed back to two weeks instead of one to integrate with the sick pay plan
- Benefit percentage is reduced to 50% to reflect the "reduced taxability" of the benefit
- Maximum benefit amount is kept at a level that will amply reward most workers but exclude much of the excess pay of the older executives, say $600 per week.
The employer cost is probably 60% lower than current because you've just designed about as inexpensive an STD plan as it's possible to construct... without really shortchanging your employees, particularly the ones who can least afford a disability.
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