HD21 - Short-Term Disability Insurance Program for State Employees
Executive Summary: House Joint Resolution 98 requested the Secretary of Administration to study two issues: (1) the possibility of providing a short-term disability (STD) insurance program for state employees; and (2) the possibility of employees using sick leave credits to fund their health insurance premiums upon retirement. I. Short-Term Disability Program Under the Commonwealth's current policies, employees who become permanently disabled are eligible for the long-term protection afforded under the State's "disability retirement" program. However, there is no income protection if employees become temporarily disabled for periods exceeding their sick and annual leave balances. A short-term disability program could provide some income protection to these employees. A Need An employee survey was conducted to determine the need for a STD program and employees' desire to have a STD program available to them. Survey results show that 95.4% of employees annually take no unpaid leave for disabilities, thereby indicating that they have no need for a STD program. Sixty-five percent of employees responding to the survey indicated that a STD program was not "very important" in their consideration of employment with the Commonwealth. In addition, the majority of respondents indicated that, if a STD program were implemented, they would prefer one that does not make any modifications to the current sick leave policies. B. Program Components To determine the feasibility of implementing a STD program, certain program components must be determined. These components include eligibility, determination of a waiting period, and determination of the benefits provided and the length of the benefits period. If a STD program were implemented, it was concluded that its components include: eligibility only to full-time classified employees (consistent with current benefits), who have been employed at least six months (to coincide with the end of each employee's probationary period); a waiting period of 14 consecutive calendar days (10 work days) (illnesses which disable employees for more than two weeks are generally indicative of the illnesses intended to be covered by a STD program); payments equivalent to of at least 50% to 60% of salary (to be consistent with industry practice and to provide reasonably meaningful income protection); and a benefit period of 26 weeks (to be consistent with industry practice). The following two modifications to the current sick leave program also were examined as potential adjuncts to a STD program: 1) changing to a non-cumulative program (i.e. unused sick leave is not carried forward from year to year); and 2) reducing the number of sick leave days provided annually. C. Mandatory or Optional Participation If employees are required to help pay for the cost of a STD program, then mandatory participation could eliminate adverse selection (i.e. having a disproportionately large percentage of employees participate who are likely to become disabled), and thus reduce claims cost. Nonetheless, if a STD program is instituted, participation should be optional because it may be undesirable to force employees to pay for a benefit which some may not want, need, or be able to afford. Of course, if the Commonwealth alone paid for the cost of a STD program, then this issue would be irrelevant, because it is highly likely that almost all employees then would participate, even under an optional program. D. Cost It was estimated that a STD program with the components set forth above, would result in annual claims costs of $18,390,363 (benefits at 50% of salary) to $22,068,437 (benefits at 60% of salary). It was estimated that administrative services would cost an additional $1.3 million to $2.2 million annually. It is possible that these costs could, in time, be defrayed by changing to a noncumulative sick leave program, or by reducing the number of sick leave days provided annually. However, realization of any substantial savings through these sick leave modifications, may be delayed due to employees continued use of sick leave balances already earned, and their increased use of annual leave balances. The monthly cost estimates for employees to purchase STD policies on their own, ranged from $20.50 to $43.50. The effective cost of these policies to employees could be reduced if they were purchased with "pre-tax dollars" through an expansion of the State's Flexible Spending Accounts program. E. Funding If a STD program is implemented, two funding issues must be addressed: (1) who will pay the cost of funding the program, and (2) how will claims be administered. It is recommended that if a participation in a STD program is mandatory, or if it involves the reduction of current sick leave benefits, then the Commonwealth should bear the cost of the program for several reasons including: it is the industry norm for employers to pay the cost; there is a general lack of demand by employees for a STD program; it may be considered unfair to reduce sick leave benefits (for which employees do not pay) and replace them with STD benefits for which employees pay. It is recommended further that, due to cost considerations, if a STD program is implemented that it be self-funded, utilizing the services of a third-party administrator to adjudicate claims and determine liability. This method is similar to the method currently used by the Commonwealth to fund its health benefits program. F. Conclusion In light of the Commonwealth's current budget situation, funding the costs of a STD program with State funds, without offsetting the costs by reducing sick leave benefits, is not financially feasible. Most employees, however, wish to have no modifications to the current sick leave program, and few would benefit annually from a STD program. Moreover, even if the sick leave program were modified, cost savings may not be realized for several years due to employees continued use of sick leave balances already earned, and their potential increased use of annual leave balances. For these reasons, it is concluded that, at this time, the Commonwealth not provide short-term disability insurance as an additional fringe benefit to employees. Employees, however, should be provided the opportunity to purchase short-term disability insurance with their own "pre-tax" funds through an expansion of the State's Flexible Spending Accounts program. Il. Funding Retirees' Health Insurance Premiums With Sick Leave Credits Due to concern with rising health insurance costs, HJR 98 also requested an examination of the feasibility of funding retirees' health insurance premiums with the payment due them under current policy for 25% of their unused sick leave balances, up to a maximum $2,500. Three methods for the use of this payment were assessed: (1) direct debit, (2) full premium annuity, and (3) life annuity. Implementation of a program for funding retirees' health insurance premiums with sick leave credits would provide retirees a tax advantage. However, the majority of employees indicated a desire to retain the current lump sum payment for unused sick leave. Using sick leave credits to fund retirees' health insurance premiums would not alleviate significantly the high costs of premiums. Furthermore, it could result in the Commonwealth incurring administrative costs at a time when fiscal constraints are critical. Therefore, it is recommended that the Commonwealth maintain the current lump sum reimbursements for unused sick leave. Employees, of course may choose to invest this lump sum in any manner they desire, including purchasing annuities. |
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