Long Term Disability Explained
(as much as we can in the space and time allowed)
There is no doubt that long term disability is the most important benefit in any employee benefit plan. Despite that, there are still many plans that don’t include it (particularly small groups), though the majority of non-profit plans do include LTD. While it is the most important, it can also be the most complicated.
What is LTD?
LTD is income replacement. When an employee is unable to work due to illness or injury, the benefit pays a portion of their monthly income until they are able to work again (or termination which is indicated in the plan design).
What does LTD cover?
When an employee is disabled and cannot do their job, LTD will pay a portion of their salary. Unlike WSIB, LTD is not limited to work-related disability.
The disability could be due to a serious illness, an injury (including a work-related injury) or mental stress. Typically, a claimant will receive a benefit for up to two years if they cannot do their own job. After two years, it must be demonstrated that they can’t perform any occupation (within reason). As long as they cannot work, the benefit will continue to age 65 or, if a shorter plan duration, coverage could end sooner.
How much does it pay?
Plans vary. There are two types of plan; taxable and non-taxable.
- Taxable plan means that a claimant’s benefit is subject to income tax. This occurs if the employer is paying any part of the premium. A typical plan design might pay 66.67% of a claimant’s monthly income to a maximum of $5,000.
- A non-taxable LTD plan means that the claimant’s benefit is not subject to income tax. This occurs if the employee is paying the entire premium. Typically this plan might pay 60% to 66.67% of monthly salary up to a maximum amount.
However, insurance carriers will not pay more than 85% of a claimant’s monthly salary. They call this the All Source Maximum. For example, if CPP is also paying a benefit, that amount will be withheld from the LTD benefit. Income from other sources may also be offset to maintain the 85% maximum.
In the case of a non-taxable plan, the 85% refers to net income. Often, higher income earners with a 66.67% benefit or even 60% find that their benefit exceeds the 85% all source maximum and that they are paying premium for more than they can receive. The solution is a tiered benefit design that generates as much benefit as possible without crossing that line. A typical formula might be 66.67% or the first $2,500, 50% of the next $3,500 and 40% of the balance to a maximum.
What is a Non-Evidence maximum?
The plan maximum is the maximum amount of benefit available regardless of income. A non-evidence maximum (NEM) is the maximum amount available to claimants without providing evidence of good health. The maximum can be as little as $0 for small employers (meaning all employees must submit health evidence to be eligible for any benefit), to $5,000 or more for large employers (meaning that most or even all employees would not be required to submit evidence). Evidence could also be requested if an employee receives a salary increase in excess of 15% in a 12 month period.
What is the waiting or elimination period?
Plans normally begin paying at the end of a waiting period. A typical waiting period is 119 days from the last day worked. The gap is usually covered by a combination of sick leave and EI. If an employer offers short term disability, this benefit can fill the gap.
What is the application process?
Insurance carriers will post applications on their web sites. They require the employee, the employer and the claimant’s attending physician to complete an application. The insurer may request more detailed information from the physician to help understand the claim and make a decision to approve. The more information provided the better.
The insurer will review the applications and the medical information to determine eligibility and duration.
What is waiver of premium?
Once a claim is approved, insurance companies will waive all premiums related to the claimant for Basic Life, AD&D, Dependent Life and, of course, LTD. These premiums will be waived and remain with the insurer as long as the employee is unable to work even if the employer changes carrier. The premium waiver may be available even if a claim is denied. The criteria for waiver are based on the determination that a claimant is unable to work, not that they have been approved for LTD (pre-existing condition, for example).
What if an applicant is declined?
There are numerous reasons why a claim might be declined. A new employee with an illness that was diagnosed, or should have been diagnosed, before the end of their probationary period, will be declined (pre-existing condition). Cases where the medical information doesn’t support the claim or it is determined that the employee can continue working regardless of the illness or injury, may also be declined. Often, the medical information is incomplete so an appeal accompanied by more medical information may reverse a decline decision.
What if there is a WSIB claim?
Workplace Safety and Insurance Board (WSIB) claims are made when an injury or accident is work related. In these cases, an LTD application should also be made. If approved, the claim may not pay anything, as WSIB payments are typically greater. However, if the WSIB coverage ends before an employee is ready to return to work or if the claim is denied, the LTD plan can fill in seamlessly.
How is Rehabilitation Managed?
The goal of the insurance company is to have the employee return to work as soon as possible but not before the employee is able. This is a fine line that often requires a ramped-up return to work.
Insurers may
- continue to pay a claim offset by the income received through the return to work process
- they also negotiate with physicians, plan sponsors and the disability case manager
- establish return-to-work plans
- arrange vocational rehabilitation services such as job coaching, resumé preparation, volunteer placements and, if necessary, retraining
When can I terminate an employee who is on Long Term Disability?
An employee who is off work and on LTD may never return to work; often, they are still considered employees who are entitled to health and dental coverage and other benefits. At some point it becomes clear that there will be no return in the foreseeable future – this requires a policy. While there are many factors that can determine when termination is appropriate, establishing a policy and communicating that policy to all employees can save an employer grief if someone goes on LTD.
If you already have an employee on LTD and don’t know when you can terminate, it is best to consult a human resources professional (ASSOCIUM Consultants has 31 years of experience!). They can also help you to establish a policy going forward.
Some Advice
When an illness or injury appears like it could become a long term disability, don’t hesitate to make a claim. It is better to ensure the claim is completed in a timely manner. If the employee returns to work earlier, the insurer is more than happy to close the claim.
Don’t hesitate to ask for help. The stress of an illness or injury on the employee and their family members, as well as the employer, need not be aggravated by the claim process. ASSOCIUM is on your side and is experienced at assisting when a disability claim must be made.
There are many more questions than space has allowed us to answer here. Please feel free to ask us for clarification, more details or assistance.
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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.