Tax Advice for Short-Term Disability
- STD insurance plans generally have benefit periods that last for several weeks up to a couple of years. Payments from these plans cover 40 to 65 percent of the insured person's pre-disability salary, according to the Life and Health Insurance Foundation for Education. Some plans cover to as much as 80 percent. Most STD plans come with waiting periods, which insureds must satisfy before receiving benefit payments. Waiting periods vary in length; some last for as long as two weeks but some insurers waive these requirements for disabilities such as pregnancy and injuries suffered in car accidents.
- Workers in several states can apply for disability benefits through its governments. These disability plans, which are funded by workers via payroll taxes, pay benefits for periods lasting several weeks to one year. Benefit amounts are based on the workers' pre-disability incomes but vary by jurisdictions. California, for example, pays disabled workers 55 percent of their previous earnings while New York covers 50 percent. However, California and New York are two of only five states that provide disability coverages for its workers; the other three are Hawaii, New Jersey and Rhode Island.
- Private and group STD plans have several benefits and drawbacks. Individuals purchase private plans directly from insurers, while group coverages are sponsored by employers or professional groups. Private plan owners have the authority to modify their coverages. These policies are portable, which means the insured person maintains coverages after changing jobs or relocating. However, insurers can deny an applicant coverage if he is a high risk and the policy owner is solely responsible for the premium. On the other hand, group-sponsored plans accept all eligible applicants regardless of their medical histories. Plan sponsors also pay part of the premium amounts, lowering the members' insurance costs. But group plans are "one size fits all," and members have no power to change their coverage. Members will lose coverage altogether if they leave their job or their association.
- The taxation of short-term disability benefits depends on how the premiums are paid. For example, individually owned disability plans are generally paid with after-tax dollars and benefits will be received tax-free by the insureds. State disability plans also pay benefits that aren't considered taxable compensation by the IRS because they are funded with payroll taxes. However, some group-sponsored plans are paid with pre-tax dollars, and therefore benefits are considered to be taxable income by the IRS.