When a small-business employee faces a non-work-related illness or injury that keeps them off the job for an extended period, the consequences can ripple across your company.  

For the employee, the sudden loss of income can lead to financial strain. For the employer, it could mean decreased productivity, workflow disruptions, and the risk of losing a valued team member.  

Offering short-term disability insurance can help mitigate those risks. It provides a layer of financial protection by replacing a portion of an employee’s income while they’re unable to work. And it gives employers a better chance of retaining skilled workers.

Yet not all businesses offer this protection.  

According to the U.S. Bureau of Labor Statistics (BLS), only 40% of private industry workers had access to short-term disability insurance as of March 2023, and access rates were much lower in smaller firms. Among establishments with fewer than 50 workers, just 23% provided access to short-term disability benefits.

This article offers an overview of helpful information about short-term disability insurance for small business employers, including how it works, why it matters, and how to evaluate your options.

What Is Short-Term Disability?

Short-term disability insurance is a benefit that helps replace a portion of an employee’s income if they’re unable to work due to a temporary medical condition. This might include recovery from surgery, an injury, or a serious illness that isn’t job-related. In some cases, it can also cover complications from pregnancy or childbirth.

The goal of short-term disability is to offer financial support during a period when employees can’t earn their regular wages but are expected to return to work once they’ve recovered.  

Benefit payments typically begin after a short waiting period (sometimes called an elimination period) and, depending on the plan and the nature of the disability, typically last for three to six months.

It’s also important to understand how short-term disability differs from long-term disability insurance. While both provide income replacement, long-term disability is designed to begin after short-term disability payments end and is meant for more serious or lasting conditions that prevent someone from working for an extended time, often six months or longer.

How Does Short-Term Disability Work?

When an employee covered by short-term disability insurance experiences a qualifying medical condition that temporarily prevents them from working, they can file a claim.  

The process usually begins with a medical diagnosis and supporting documentation from a healthcare provider, which is then submitted to the insurance company for review.

If the claim is approved, payments don’t usually begin immediately. Most plans include a waiting period of seven to 14 days. During this time, employees may need to use paid time off (PTO) or sick leave, if available, to cover their income gap before disability payments start.

After the waiting period, the employee receives a percentage of their regular wages, commonly between 50% and 70%, depending on the terms of the policy. These payments continue until the employee returns to work or reaches the end of the maximum benefit period, which typically ranges from three to six months.

Who Pays Health Insurance While on Short-Term Disability?

In most cases, whether benefits continue depends on the employer’s policies. Many employers choose to keep employees on their health plan, with premiums continuing to be deducted from short-term disability payments just as they would from a regular paycheck.  

If health insurance coverage ends during the leave, employees might be eligible to continue their health insurance at their own expense through COBRA (for employers with 20+ employees) or a state continuation program.

If the short-term disability leave also qualifies for protection under the Family and Medical Leave Act (FMLA) — a federal law that provides eligible employees with up to 12 weeks of unpaid, job-protected leave — the rules are different. Under FMLA, employers are required to maintain group health insurance coverage during the leave, as long as the employee continues to pay their portion of the premium, if applicable, and under the same terms as if they were working.

Note: FMLA generally applies only to employers with 50 or more employees, and employees must meet certain work history and hours-worked requirements to qualify.

What Qualifies for Short-Term Disability?

Short-term disability insurance can typically cover a wide range of temporary medical conditions that prevent employees from performing their job duties. These may include both physical and mental health issues, as long as they meet the criteria outlined in the employer’s policy and are certified by a medical provider.

Common qualifying conditions may include:

• Injuries from accidents (such as car crashes or serious falls)

• Recovery from surgery (e.g., orthopedic, abdominal, or cardiovascular procedures)

• Pregnancy and childbirth-related recovery

• Acute illnesses that require extended rest or treatment (like pneumonia or severe infections)

• Musculoskeletal disorders such as back pain, joint issues, or repetitive strain injuries

• Digestive conditions that significantly impact function or require hospitalization (e.g., Crohn’s disease flare-ups)

• Mental health conditions, including severe anxiety, depression, or post-traumatic stress disorder (PTSD), when they temporarily prevent someone from working

Keep in mind that specific covered conditions and the required documentation can vary by plan.

Offering Short-Term Disability: What Employers Should Know

If you're thinking about offering short-term disability insurance to your employees, it's important to understand how it works from the employer’s perspective. Below is a closer look at considerations and responsibilities you should be aware of as an employer.

Is Short-Term Disability Insurance Required?

In most states, offering short-term disability insurance is optional for private employers. However, a few states, including California, New York, New Jersey, Rhode Island, and Hawaii, have laws requiring employers to provide short-term disability coverage or access to a state-run program.

If you operate in one of these states, take time to understand the compliance requirements, contribution rates, and reporting obligations. In all other states, offering short-term disability is voluntary, but it can still be a valuable way to support employees and remain competitive.

Employer Responsibilities

Even when not legally required, offering short-term disability coverage comes with a few key responsibilities. These might include:

• Choosing a policy that fits your workforce and budget

• Providing employees with information about their coverage and how to file a claim

• Withholding and remitting premiums if employees contribute to the cost

• Coordinating with HR or a third-party administrator to handle claims and documentation

Clear communication and documentation are key, especially around eligibility, benefit duration, and how short-term disability interacts with other types of leave (like FMLA, state and local leave laws, PTO, or other time off policies).

Who Pays for Short-Term Disability Insurance?

Employers can choose how the benefit is funded. The three most common models are:

• Employer-paid: The company covers the full cost of premiums, offering short-term disability as a company-provided benefit.

• Voluntary (employee-paid): Employees can opt into coverage and pay the premiums themselves, often through payroll deductions.

• Shared-cost: Both the employer and employee contribute to the cost of the coverage.

Reasons Short-Term Disability Can Be Denied

Short-term disability insurance provides critical support, but not every claim is approved. Common reasons for denial could include:

• Insufficient medical documentation: Claims must be supported by detailed records from a healthcare provider explaining the diagnosis, treatment plan, and how the condition affects job performance.

• Condition doesn’t meet the policy definition: If the illness or injury doesn’t align with the policy’s criteria for a qualifying disability, payments may be denied.

• Pre-existing conditions: Many plans exclude or limit coverage for conditions that existed before the employee enrolled.

• Late filing: Most plans require claims to be submitted within a set timeframe. Missing that deadline can result in automatic denial.

• Lack of ongoing medical care: Employees generally must be under the care of a doctor and follow a prescribed treatment plan.

• Incomplete or inaccurate paperwork: Missing, inconsistent, or incorrect information can delay or derail a claim.

• Failure to cooperate: Ignoring insurer requests for information, medical evaluations, or documentation can lead to denial.

Setting Up a Short-Term Disability Policy

When selecting a short-term disability plan for your business, consider factors like cost, payment duration, payment amounts, and eligibility requirements. Plans can vary widely. For help navigating your options and ensuring compliance, consider consulting with an insurance agent, qualified HR or finance professional.

If you decide to offer short-term disability coverage, it will be important to clearly outline eligibility requirements, such as minimum hours worked or length of employment, as well as waiting periods before payments begin. Be sure employees know what qualifies as a covered disability and what documentation they’ll need to provide.

To help manage leave requests smoothly, establish a consistent internal process for submitting claims, sharing updates, and coordinating with HR or your insurance provider. Encourage employees to submit medical documentation early and keep communication open throughout the leave.

Conclusion

While offering short-term disability insurance may require an investment of time and resources, it can pay off in meaningful ways.  

Short-term disability can provide financial stability during challenging times by replacing employees' lost income when health issues arise.

Offering this benefit can also help small businesses attract talent, boost employee loyalty, and support a smoother return to work after an absence.

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