Long-term disability policies take up where short-term policies leave off, covering employees who become disabled and unable to work for longer periods of time (generally six months or longer).

 

According to a recent government survey, 22 percent of employees in small businesses participate in long-term disability plans. The Bureau of Labor Statistics (BLS) periodically does a survey of small businesses (those with fewer than 100 employees) and reports the results in a bulletin entitled Employee Benefits in Small Private Industry Establishments.

How long is long-term? Long-term disability insurance typically provides 50 percent to 60 percent of pay to disabled employees, which continues to retirement age or for a specified number of months, depending on the employee's age at the time of disability. In most plans, benefits are paid for the duration of the disability up to the age of 65. Benefits are usually computed as a percentage of the employee's basic compensation prior to the disability. There is usually a maximum dollar amount per week or month.

What counts as disabled? Long-term disability insurance plans generally define "disability" in one of two ways: it can mean the inability to perform the tasks of one's own occupation or the tasks of any occupation at all. A plan may use both definitions of disability for separate periods of time. For example, for the first 24 months of a disability, disability may be defined as an inability to perform the employee's regular job. However, after that it may mean an inability to perform any job that the employee is qualified to do.

An employee does not have to be permanently disabled to receive benefits, but most plans require that the employee has to have been a regular, full-time employee for at least a year to be eligible. The employee may no longer be eligible for regular sick pay or short-term disability benefits.

Some disability plans may require that the Social Security Administration determine or affirm that the employee is indeed disabled before they will pay. The Social Security Administration uses an "any occupation" definition of disability and has a six-month waiting period, so this standard is difficult to meet. The amount received through Social Security payments may also reduce disability benefit payments.

Administration. As with other employee welfare benefits, the plan may be subject to a federal law known as ERISA. Your administrative responsibilities should be fairly limited, since the company providing the insurance will probably act as the plan administrator, but you may be required to distribute information about the plan to your employees as part of a disclosure requirement. You may also be required to provide claim forms to employees and to provide the insurance company with information regarding an employee's eligibility status and compensation amount. Your insurer should provide claim forms and other necessary materials for distribution to your employees.

Make sure that you know up front which administrative responsibilities the insurer will be taking care of and what your responsibilities will be.