Oklahoma and Texas now allow some employers to opt-out of the traditional Workers’ Compensation plans and find alternative coverage to protect their employees against income loss due to medical issues. Other states may also allow only the business owner to opt out of W.C. coverage for the owners. What are the options to replace the protection against income lost due to injuries or sickness?
The best alternatives: Long-Term Disability Insurance and Short-Term Disability, Accident and Health Insurance
While not considered a substitute for Workers’ Compensation, Disability income insurance will pay a monthly benefit to replace loss of wages due to accidents or sickness. Unlike Workers’ Comp which only pays a benefit for on-the-job injuries or job related illnesses, Disability Income Insurance will also cover income loss from any on or off-the-job injury or illness.
Some employers may also provide accident and health policies and sick-pay plans or employer indemnification agreements as cheaper alternatives to workers’ compensation. However, employers who buy alternative coverages may be sued by their injured employees and lose their right to use key common-law defenses in court. Many alternative policies also don’t cover court judgments for pain and suffering, punitive damages, and legal fees if the employers opt-out of Workers’ Comp.
What’s the cost for the alternative to WC?
Disability insurance premiums may cost about 1-3% of an employee’s annual income for individual paid plans and significantly less if it’s a group discounted plan where the premium is paid through the employer. Whoever pays the premiums will also impact the taxation of disability insurance benefits: if the employer pays the premiums with pre-tax dollars, then the benefits will be taxed, if the employee pays the premium with after-tax dollars, then benefits received will be tax-free.
Main differences between individual disability insurance plans and employer sponsored plans:
- Portability – individual plans are portable, meaning that an employee can keep the plan when changing jobs, while employer plans benefits are lost when changing employment.
- Premium fluctuation – individual plans are generally non-cancellable and guaranteed renewable, meaning that premiums are fixed for the life of the insurance contract and do not increase with age, while employer paid plans premiums may increase over time.
- Underwriting concessions – while most group disability insurance / employer sponsored plans are guaranteed to issue and do not require medical testing and underwriting, individual plans are generally medically underwritten, depending on the carrier and insurance benefit amount requested.
- Employer paid plans will cover about 60% of base salary only, while individual plans can cover base salary as well as commissions and bonuses.
- An employee can have both an employer plan as well as an individual plan, for maximum income protection.