Income Replacement Options

Jan 11, 2012

What is the best approach or plan design for managing short term disability absences?  That depends. Not a very helpful answer, but the answer does encompass what is at the heart of any short term disability benefits strategy.  It truly does “depend” on a number of factors and should tie into the overall human resource philosophy of the employer.  The question of how to compensate, or protect employees financially, who do experience a short term leave is complex with a myriad of options and solutions.

Short term wage loss replacement plans can fall within a wide spectrum of arrangements from reliance on social safety nets such as Employment Insurance (EI) salary continuance plans, Worker’s Compensation benefits, insured disability programs, and self-insured salary continuance.  Programs may pay a percentage of an employee’s salary for a specified period of time, or even full salary during short term absences due to illness or injury.  Coverage may start anywhere from one to 14 days after your employee suffers a condition that prevents them working.  Some programs might also incorporate the use of “sick days” or have a salary continuance option for a specified number of days before the short term disability plan takes over.

The questions start to pile up when looking at all of the design options and the impact those options might have on the employee and on the company’s bottom line.  What is the best course for the employee and their family?  Do they apply for EI benefits? Does the employer have an EI SUB Plan, which would allow the company to top up EI benefits?  Is there duplication or is the company and plan member taking advantage of statutory benefit programs?  Finding a place to start can require as much thought as seeking a solution.  As a place to start, a short simplified scenario offers some insight into the complexities of choosing a fully insured program or relying on EI.

To capitalize on the benefit of the EI reduction, the maximum amount payable to the employee is $485 weekly, taxable and with a two week waiting period.  This may be the most cost effective route for the employer, but there is the question of whether the amount of income replaced offers an acceptable replacement ratio of pre-disability earnings.  Just as important, is the less tangible factor of how the company will be perceived in how it chooses to assist disabled employees during these short term absences. Will the company feel the need to top up the salary?  Since the company is already currently contributing into EI, it may cost no more to register for an EI SUB Plan and top up benefits which achieves the objective of providing the appropriate level of income replacement while remaining cost effective.

If the company uses an insurer for short term disability benefits, this a potential direct cost, but the employer gains a valuable resource in having the insurer adjudicate claims, maintain confidentiality, and the employer can strive for a more comprehensive wage replacement ratio.  Or, if the contract is arranged so that the employer insures only up to the EI maximum and then tops up the insured STD benefits, it would reduce the other costs associated with the self-insured portion, qualify for the EI premium reduction and still retain the insurer’s adjudication services as a resource.

This is a very short and simplified scenario, but does speak to the complexity of issues at play when looking at EI and insured disability programs.  Adopting the right governance structure and using the best processes to manage these cases to influence productivity, employee morale, and program effectiveness affects costs in both hard and soft costs.

Employers should recognize that while they can outsource case management, it is they who retain accountability and responsibility for the overall program.

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