Short-term disability considerations for employers in states with mandated benefits

Disability benefits are currently mandated in nine U.S. states plus the District of Columbia, either through paid family and medical leave (PFML) legislation or through standalone disability legislation. Several other states are moving toward adopting PFML programs of their own. Although the program designs vary by state, they all provide benefits to eligible employees who take time off from work to treat serious health conditions. These benefits are very similar to the short-term disability (STD) benefits that many employers offer their employees either through fully insured or self-insured methods. The similarities between PFML and STD benefits can create challenges in administering the benefits concurrently. This article discusses some of the key considerations for employers in states with mandated PFML benefits.

Understanding how income replacement ratios affect benefits

There are many variations in state-mandated PFML benefits, and their structures can look different from STD benefit structures. In many cases, PFML benefits are tiered to provide higher income replacement to lower-wage workers. For example, the Washington state PFML benefit replaces 90% of income for low-wage workers up to approximately $50,000 per year, then the replacement ratio decreases with increasing wages. In the graph in Figure 1, the red curve represents PFML income replacement ratios based on the Washington state PFML benefit design (similar patterns exist in other states whose programs feature tiered benefits). For comparison, the green curve represents STD income replacement ratios based on 60% income replacement up to $2,500 per week (a relatively standard STD benefit design).

Figure 2 shows an illustrative example of the differences in benefits for two employees in different wage brackets.

Because STD and state-mandated benefits overlap for part or all of the STD claim duration, employers with large proportions of low-wage workers may be reluctant to continue offering STD coverage, because the state program could be perceived as a better option. On the other hand, because the gap between STD and state-mandated benefits is significant for higher-wage employees, some employers may perceive the need to continue to provide STD benefits. The decision to continue STD coverage depends largely on the extent to which STD and state-mandated benefits overlap.

Options for providing income replacement benefits

Employers who choose to provide STD and state-mandated benefits concurrently must also decide how to best administer and coordinate the benefits, which can be challenging because state-mandated benefits are different in every state and overlap with STD benefits in different ways. The employer has the following options for providing income replacement benefits:

1. Replace the STD program with the state-mandated program. This option may be simplest in terms of administration, because it eliminates having to administer multiple plans. However, the employer has no control over the benefit design, and the mandated benefits may not provide adequate coverage for some employees. Also, some states have had challenges in managing PFML applications and benefit payments in a timely fashion, which can negatively impact the employee experience.
2. Redesign the STD program to meet all of the state-mandated requirements. This option allows the employer to maintain control over the STD benefit structure. However, compliance can be complex due to the statutory requirements, and the benefit design could change frequently because state-mandated benefits increase annually based on the state wage index.
3. Coordinating the STD program with state-mandated benefits using benefit offsets. This option provides the greatest control and flexibility in terms of benefit design. STD benefits can be designed according to the employer’s own benefits philosophy and coordinated with statutory benefits using benefit offsets. This option may be the simplest in terms of communications and maintenance. However, coordinating STD and state-mandated benefits can be difficult in certain situations, such as when the employer is located in multiple states that have mandated benefits, or if the STD plan features a nontraditional structure such as core and buy-up benefits.

Considerations for employers located in multiple states

Many employers have become increasingly dispersed across different states, a dynamic that may have been accelerated by remote work habits during the COVID-19 pandemic. An employer that has employees in multiple states must ensure that each employee receives the benefit mandated in the state where they work. This can be an administrative burden for employers with a large national footprint. Disability insurers and benefit administrators have developed administrative platforms to assist employers that choose to outsource the administration. The employer’s decision to outsource is often motivated by the desire to simplify administration through a centralized and methodical framework. Other important considerations include compliance, case management, and risk. For example, it can be very challenging for multinational employers to keep up with the various compliance requirements emerging at the federal, state, and local levels.

The following are other important considerations for employers located in states with mandated PFML benefits. Many of these can be addressed through outsourcing.

• Acquiring software that supports compliance, the application process, and data exchange.
• Developing communications for employees and unions, including state variations because legislation is different in every state.
• Coordinating STD and/or state-mandated benefits with benefits from federal programs, including the Family and Medical Leave Act (FMLA) and the Americans with Disabilities Act Amendments Act (ADAAA).
• Designing a program that is relatively simple and flexible, with the understanding that there will likely be program changes to adapt to the changing PFML landscape. Many more states are expected to pass their own PFML laws over the next few years.

Conclusion

The rise in state-mandated PFML benefits poses administrative, compliance, and plan design challenges to employers. It also provides employers with the opportunity to restructure and offer more robust benefits to employees. By approaching these challenges as more than a compliance need, employers have the opportunity to rethink and redesign their leave programs in a manner that will be valued by employees without placing an excessive burden on the company’s benefits staff.