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Long-term disability insurance replaces a portion of an employee's income when illness or injury prevents them from working beyond a short-term disability period. Group LTD typically pays 50 to 70 percent of pre-disability earnings after an elimination period, subject to a monthly maximum and a defined benefit duration.
An LTD policy has a few defining parts. The elimination period is the waiting time before benefits begin, often 90 or 180 days, which is usually aligned with the end of short-term disability. Many contracts add a residual disability benefit, which pays a partial amount when the employee can work in a reduced capacity, sized to the share of earnings actually lost rather than treating the claim as all or nothing. The definition of disability determines whether the employee must be unable to perform their own occupation or any occupation for which they are reasonably suited; many policies use the own-occupation standard for the first 24 months and switch to any-occupation afterward. The benefit duration often runs to Social Security normal retirement age.
Benefits are typically offset by Social Security disability, workers' compensation, and other income sources, so the check is smaller than the stated percentage suggests. Taxation follows who paid the premium: if the employer pays with pre-tax dollars, benefits are taxable income; if the employee pays with after-tax dollars, benefits are generally tax free. Some employers gross up the premium so employees receive tax-free benefits. LTD replaces income and does not pay for custodial care, which is what long-term care insurance covers.
Group LTD is an ERISA welfare plan, so plan documents, an SPD, and claims and appeals procedures apply. Coordinate LTD with FMLA, ADA accommodation, and your leave policy. A common administrative mistake is dropping an employee from the health plan or missing a COBRA qualifying event while they are on an extended disability leave.
After the elimination period, which is the waiting time built into the policy. It commonly runs 90 or 180 days and is usually set to line up with the end of short-term disability coverage. Benefit duration then often continues to Social Security normal retirement age if the employee remains disabled.
It depends on who paid the premium. If the employer pays with pre-tax dollars, the benefits are taxable income to the employee. If the employee pays with after-tax dollars, benefits are generally tax free. Some employers gross up the premium so that employees end up receiving tax-free benefits.
Because of offsets. Most policies reduce the benefit by Social Security disability payments, workers' compensation, and other income sources, so the amount actually paid falls below the headline replacement percentage. Read the offset provisions before communicating the benefit, since employees usually assume the stated percentage is what they will receive.