Self-funded short-term disability vs. fully-insured plans – Part 1

Employers can choose to offer short-term disability benefits via a self-funded plan or a fully insured policy. While many smaller employers opt for fully insured plans due to the predictability and stability of fixed monthly premiums and the transfer of risk to the insurance carrier, larger employers tend to choose self-funded plans so they can pay claims as they occur, which can save money over time (especially if the claim volume is lower than expected) and help with cash flow management.

Self-funded short-term disability plans can offer increased flexibility in plan design, allowing employers to tailor the benefits to their workforce. Self-funding also gives the employer access to detailed claim information and, the ability to override an administrator’s claim decisions, if needed. It can come with increased liability and consultation with legal and employment policy resources to ensure internal handling aligns with business risk tolerance and guidelines.

Additional considerations when self-funding

Maternity enhancements

While we applaud employers who want to ensure their employees who are working parents have access to robust paid leave benefits when welcoming a new child, there are considerations they need to think about before adding enhanced maternity benefits to their self-funded short-term disability plan.

Short-term disability plan enhancements typically involve waiving the initial elimination period for birth parents and/or offering a higher percentage of pay (e.g., paying birth parents 100% of their pay during disability, even though the plan only pays 60% for other disabilities). However, this could appear discriminatory against employees who have other types of disabling conditions who do not receive the same level of benefits as those disabled due to childbirth.

If an employer would like to provide birth parents with paid benefits that exceed the standard short-term disability benefit, think about offering a separate paid company leave for recovery from childbirth to supplement the short-term disability plan.

Zero-day elimination periods

An elimination period in a short-term disability plan is an unpaid waiting period that a disabled employee must satisfy before benefits become payable. The general standard is to require an employee to satisfy a seven-calendar-day elimination period, with benefits becoming payable on day eight.

Fundamentally, short-term disability plans are meant to make benefits available to employees experiencing a significant medical issue that is expected to prevent them from working for more than one week. This requires the disability administrator to gather medical information from the employee’s treating provider(s) to determine the condition’s severity, resulting impairment and expected duration in order to make a claim decision. However, when an employer has a short-term disability plan with a zero-day elimination period, it may open the plan to receiving claims for minor and episodic conditions of very short duration (sometimes one day), where in many cases, the employee hasn’t sought medical attention, and therefore no proof of disability is even available.

One way to solve for this is to limit the events where a zero-day elimination period applies. For example, most commonly, we see this via a waiver of the elimination period may be in effect when an employee is hospitalized overnight. This allows benefits to become payable immediately, but the overnight hospitalization requirement helps to ensure that the employee’s medical condition is significant.

Rolling calendar maximum duration

A typical short-term disability plan has a set maximum duration—usually 13 or 26 weeks, inclusive of the elimination period—that applies on a per-claim basis. Often there is also a successive or recurrent disability provision stating that, if the employee is disabled and out on an approved short-term disability claim then returns to work full-time and later goes back out of work for the same or related disabling condition within a certain timeframe, they don’t have to satisfy a new elimination period, and the original short-term disability claim may be reopened and continued.

The recurrent or successive timeframe is typically 14 or 30 days. However, sometimes employers choose to apply a maximum that only permits a set number of weeks to be paid in a rolling calendar period. An employee who has multiple short-term disability claims over the rolling calendar period (either for different disabling conditions or for periods of disability for the same or related condition that exceed the recurrent timeframe) can exhaust their short-term disability benefits long before they’ve satisfied the long-term disability elimination period. As a result, they may have an extended gap of time between their short- and long-term disability where they are considered disabled but not receiving benefit payments.

Offering short-term disability benefits is an important step towards ensuring financial security for employees during challenging times. Whether through a self-funded plan or a fully insured policy, employers have the flexibility to choose the best approach for their organization. While self-funded plans offer greater customization and potential cost savings, they also come with increased responsibilities and risks. Employers should carefully consider how any choices they make regarding their short-term disability plan could impact their employees’ long-term disability benefits. By thoughtfully designing and administering these benefits, employers can support their workforce and help contribute to a more financially secure future for all.

If you have questions about best practices and recommendations regarding short-term disability plans, please contact your Symetra representative.