Short-term Disability Insurance - Income Replacement Benefit

Plan Design

Short-term disability claims are administered by and insurer or some other third party. The claims adjudicator is responsible for determining whether the claim should be paid and for what duration. It is prudent to seek legal counsel before acting as both the employer and claims adjudicator. Claims resulting from an accident and illness that is serious enough to require hospitalization are easier to adjudicate than sickness claims. In an effort to reduce the cost of administration, most plans do not pay benefits for the first week of sickness.

As a disincentive to prolong claims, most benefit schedules are designed to ensure a 15% loss in after-tax earnings.

It is important to define earnings appropriately and structure the elimination period according to your work schedule. In some situations it is appropriate to express the elimination period and benefit period as scheduled shifts missed.

The plan design should facilitate early return to work an a part-time or modified duty bases.


Employer Paid
Employer contributions toward the cost of disability insurance are non-taxable benefits but the disability claim benefits are taxable income. The employee can offset the taxation of their claim with their contribution toward the premium.

Employee Paid
If the employee pays the full cost of disability insurance then any disability claim benefits are non-taxable income.