Short-term disability insurance pays financial benefits to individuals who are out of work due to temporary illnesses or injuries. There are several sources of disability income available for workers across the United States. Some short-term disability benefits are paid tax-free to the insured, depending on how the coverages are funded.
Short-Term Disability Income Sources
Workers have several options available to obtain short-term disability coverage and protect their incomes. They can purchase STD insurance directly from insurance companies. Their employers may also sponsor group STD coverage for its employees. STD plans are also sponsored by some state governments. States such as Hawaii, New York, New Jersey, Rhode Island and California have short-term disability plans, funded by payroll taxes, that pay workers for several months to one year.
One of the benefits on having short-term disability insurance is the different medical conditions that are covered. Most injuries and illnesses that keep individuals from working for a week or longer qualify as disabilities. Pregnancies and family leave are also covered by STD plans. The exceptions are medical conditions that occur during criminal activities, under the influence of alcohol or illegal drugs or were self-inflicted. Some of the most common temporary disabilities are back injuries, arthritis and diabetes. However, these disabilities must occur outside of work. Job-related disabilities are not covered by STD plans, but workers may be eligible to receive temporary income payments from workers’ compensation insurance.
Without STD insurance, workers may not have any other source of income, which can put serious financial strain on their households. With STD coverage, workers are able to replace some of their lost income until they are able to return. STD benefit amounts vary by insurer, but most pay between 40 and 65 percent of the worker's income. Some STD plans, according to McClaren & Associates, pay up to 80%. Insurers also provide different benefit periods. Plans may pay insured workers for periods ranging from several weeks up to 2 years. according to the Insurance Information Institute.
Most STD plans pay benefits that are not required to be reported on the workers’ individual tax returns. However, there are some exceptions. STD plans that are paid with pre-tax dollars, such as group-sponsored coverages pay taxable benefits to the insured. State-sponsored STD plans from California and Rhode Island also pay tax-free benefits to workers. One of the states that requires workers to report their disability income to the IRS is New Jersey.