Disability insurance can keep the bills paid, protect workers

Are your employees' paychecks protected?

Since May is Disability Awareness Month, you should be aware of two startling statistics:

* Over one in four of today's 20-year-olds will become disabled before they retire, according to the Social Security Administration.

* And the U.S. Census Bureau says accident or illness will keep one in every five workers out of work for at least a year before they reach 65.

With continued economic volatility, the rising number of home foreclosures, high unemployment, and eroded retirement accounts, it is important to consider how your employees' bills would be paid if their paycheck suddenly vanished due to an accident or illness. Disability insurance is one way to protect them and is the second most important type of insurance (after medical) to ensure that a worker's family is cared for and their lifestyle maintained.

Disability insurance is designed to replace a portion of the employee's income if he or she becomes disabled and is out of work for an extended amount of time. It can be obtained either on an individual basis or through an employer benefit package or group policy. Employers can offer disability insurance to their employees for significantly less than an individual policy which, in turn, adds a valuable benefit to a compensation package.

A common question for employers and their employees is whether the disability benefits are taxable when they are received. That depends. If the employer designates the plan as a 2004-55 Arrangement, then the disability premium can be paid with employee after-tax dollars, and the benefit will be received tax- free. This is an important thing to consider for the employee because the benefit typically only covers a percentage of the employee's salary and by receiving the benefit tax-free, it eliminates any further reduction.

The best option for the employee is when an employer chooses to "gross up" the employee's salary by the amount of the disability plan premium. This method would also result in the employee receiving the benefit tax-free. It is important to note that if the employer chooses the "gross-up option," the federal "three-year rule" must be considered.

This rule requires a three-year "look back" on the disability policy. To determine what is taxable, you need to calculate the total amount of premium the employer paid on the policy over the last three years and what percentage of the policy that equals. The percentage of benefit that is taxable equals the percentage of employer-paid premium during the last three years. In other words, if your policy has been in existence for three years, and the employer paid the premium for one of those years, then about 33 percent of the benefit is taxable. If the employer paid portion is $0, then the benefit would be paid 100 percent tax-free.

These simple disability plan options are an easy and inexpensive way to offer employees a valuable addition to their compensation package. More than half (56 percent) of U.S. adults say they would be unable to pay their bills or meet expenses if they became disabled and could not work for a year or longer, according to the National Assoiation of Insurance Commissioners. Illnesses like cancer, heart attack or diabetes cause the majority of long-term disabilities. Back pain and arthritis are common causes as well. Most are not work-related and therefore are not covered by workers' compensation. Are you and your employees protected?

Melissa Davies is a benefit solutions Consultant with Clark Insurance Solutions in Reno. Contact her at mdavies@clarkandassoc.com.