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Workers’ compensation vs disability insurance

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When employees become ill or injured, they may be unable to work, but they still need an income. Workers’ compensation and disability insurance are two different types of programs that can provide benefits. Learn about the differences between workers’ compensation vs disability insurance and why your workers may need access to both.

What are workers’ compensation benefits?

Workers’ compensation insurance (or workers’ comp) covers workers who are injured or become ill in the course of their work. States regulate programs and are responsible for establishing their own workers’ compensation regulations.

Nearly every state requires most employers to maintain workers’ compensation coverage. According to Investopedia, Texas is the only state that does not make workers’ comp mandatory. In other states, employers are generally required to maintain coverage, although small employers may be exempt from workers’ compensation requirements, depending on the number of employees they have. States may also have different requirements for different industries.

Employees are typically eligible for workers’ compensation benefits if they experience a work-related illness or injury. To file a workers’ compensation claim, the injured worker needs to report the illness or injury to the employer within a reasonable period of time – states have established different deadlines for exactly how much time workers have. Some workers’ compensation claims may be denied or challenged for certain reasons; for example, if an injury is the result of intoxication or roughhousing, or if it’s unclear that the cause of the condition was work related.

Workers’ compensation benefits vary by state but typically include coverage for medical bills and prescriptions and some compensation for temporary disability while the employee is unable to work. Employees who do not recover and suffer permanent disability may be eligible for permanent disability benefits.

What are disability insurance benefits?

Disability insurance benefits replace a portion of a worker’s income if the employee is unable to work due to a disability, such as an illness or injury.

There are different types of disability insurance programs:

  • Social Security Disability Insurance is a federal program. Eligibility for Social Security Disability Insurance benefits is based on work history and payment of payroll taxes. Employers and workers each pay 6.2 percent of wages up to the taxable income, which is $160,200 in 2023, according to the Social Security Administration (SSA). Beneficiaries must also meet strict medical requirements.
  • Group disability insurance benefits are provided by employers, often on a voluntary basis. The employer may pay for the premiums, or the employee may pay, often via payroll deductions. Some policies cover short-term disabilities with benefit periods of a year or less, whereas other policies cover long-term disabilities and have longer, but variable, benefit periods. The U.S. Bureau of Labor Statistics (BLS) says 40 percent of civilian workers have access to short-term disability insurance and 35 percent have access to long-term disability insurance.
  • Individual disability insurance benefits are purchased by the individual and may provide more robust benefits than group policies. However, they can also be more expensive and may have underwriting requirements that make it difficult for some individuals to qualify for coverage.
  • State disability insurance programs are less common, but SHRM says Hawaii, New Jersey, New York, California and Rhode Island all have state-mandated short-term disability insurance requirements, and Puerto Rico also requires coverage.

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Key Differences Between Work Comp and Disability Benefits

Workers’ compensation and disability insurance may seem similar because they both provide injured or sick workers with benefits, but there are critical differences between these programs.

  • Workers’ compensation only covers work-related injuries and illness, but disability insurance can cover disabilities that do not occur in the course of work. This is important because not all disabilities can be traced back to work. An employee might be injured in a car crash, for example, or while engaging in sports and hobbies. Employees can also experience heart attacks, strokes, cancer and other health conditions. Even though these injuries and illnesses are not work related, they can force the individual out of work, which can lead to financial hardship.
  • The state heavily regulates workers’ compensation programs. It determines eligibility for benefits, the amount of benefits and other key factors. Private disability insurance varies depending on the insurance company.
  • Workers’ compensation coverage is typically mandatory for employers. Employers must also participate in the Social Security program via payroll taxes. Plus, a handful of states require employers to participate in state short-term disability insurance programs. Group disability insurance, however, is typically optional.

What should you offer your employees?

When it comes to workers’ compensation vs disability insurance, it’s not a question of either/or – you can offer both to your employees.

According to the SSA, one in four of today’s 20-year-olds will become disabled before reaching retirement age. If your employees become disabled and cannot work as a result, they will need another source of income to make ends meet. If the disability is work related, workers’ compensation will probably cover them. However, if the disability is not work related, disability insurance may be their best option.

As an employer, you must comply with state and federal requirements for workers’ compensation, Social Security taxes and state disability insurance program participation. However, even if your company is not required to maintain workers’ compensation coverage, you should seriously consider doing so. If you don’t have coverage, you could be on the hook for medical costs and lost wages if an employee is injured on the job. Maintaining coverage protects both your company and your workers.

Additionally, although you may not be required to offer private disability insurance, doing so is a fantastic way to take care of your employees. A benefits package that includes private disability insurance can support your employee recruitment and retention strategies.

Disability Insurance Benefit Options

When it comes to offering workers’ compensation, you need to comply with your state’s rules. However, when offering disability insurance, you have a lot of options. You can cover the cost of the group disability insurance premiums or offer disability insurance as a voluntary benefit that employees can pay for using payroll deductions. Either way, group insurance is an easy way to make sure all your employees have access to coverage. The discounted group rates can make coverage affordable.

For your executive employees, you can also provide supplemental disability insurance benefits as part of a Section 162 executive bonus plan. This is a practical way to make sure your top employees have robust coverage that suits their higher incomes.

In addition to disability insurance, you can round out your employee benefits package with other policy types, such as life insurance, personal accident insurance, cancer insurance, long-term care insurance and critical illness insurance.

Creating Your Workers’ Compensation and Disability Insurance Strategy

To compete for top talent, you need an employee benefit plan that addresses the needs of workers. Disability insurance is a key element. You also need to comply with state and federal regulations regarding workers’ compensation, Social Security, disability insurance and executive bonus plans. Higginbotham can help your put together an employee benefits package. We also offer HR services to help you stay compliant. Learn more.

Not sure where to start? Talk to someone who wants to listen.

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