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Employee-Paid Long Term Disability Coverage

Recently, we’ve been seeing a trend towards employees wanting to decline Long Term Disability (LTD) coverage when the plan is an employee-paid design. Current economic conditions, and rising insurance costs are the main factors. Often, however, employees don’t see the value in disability insurance.

We have always maintained that LTD is the most important benefit in an employee benefit plan. In case an employee can no longer work due to illness or injury, an eligible LTD claim pays a portion of an employee’s insured salary as long as they are unable to work. In some cases, an employee may never be able to work again and may, therefore, receive coverage until they are 65 years of age.

There are various plan designs and funding options available for LTD benefits as well as differing tax treatment depending upon who pays the premium. The most common design pays 66.67% of an employee’s monthly salary to a maximum. The maximum depends upon the employee’s actual salary and the maximum amount the insurer is willing to cover, based again, on the employee’s salary as well as the size of the employer. 

Another common plan design is the employee-paid plan. Tax regulations stipulate that, if an employee pays 100% of their LTD premium each month, the benefit will be tax-free if they ever claim. It is mandatory for an employer offering such a plan to ensure all employees participate. Otherwise, it ceases to a group plan.

The trend towards opting out is a troubling one. Employees aren’t seeing the value of LTD coverage (“it will never happen to me”) and employers may not realize the potential liability to them if an employee opts out and, later on, becomes disabled.  On the second point, law suits have been lost by employers based on an employee’s claim that they were not adequately informed of the consequences of opting out.

Long Term Disability Coverage Options to Consider:

  • Switch to an employer-paid plan;
  • If an employer-paid plan is unaffordable, an, an employer could subsidize the premium, somewhat, by increasing pay to help offset the cost to employees;
  • Communicate, particularly to new employees, that the LTD plan is a condition of employment and that it is mandatory;
  • Consider changing plan design. Less expensive five year or even two year plan duration options are available. All employees would have to switch and, to be clear; it could impose a hardship if an employee suffers a lengthy, disability.
  • Extend the common 119 day waiting period to as much as 52 weeks. While this will lower premiums, the employee will be challenged to fill what could amount to a 35 week gap, (assuming the employee qualifies for Employment Insurance Sickness Benefits for the first 15 weeks).

There are a number of reasons that an employee or employees will want to opt out of LTD coverage, however, as it is the most important benefit, all possible should be done to keep the coverage in place for all employees.

One further important point:  Insurers may impose what is called a Non Evidence Maximum (NEM) which is the highest amount of coverage available to an employee without submitting evidence of good health to the insurer. For some employees, the NEM can be higher than their monthly income. However, where an employee could be eligible for more coverage, after a salary increase for example, it is vital that the employee be made aware of this and be given the option to apply for more Long Term Disability coverage. Please contact your ASSOCIUM Plan Administrator for more information.


ASSOCIUM Benefits is a very unique employee group benefits provider, focused on supporting benefits Advisors and their employer clients. We provide Brokers and Plan Sponsors with a range of solutions from traditional group benefits to more customized, cost and tax effective employee compensation. Let’s connect to find out how we can help.

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