Differences Between Short- and Long-term Disability Insurance + COBRA

June 30, 2023

Voluntary benefits are becoming increasingly important to employees as they focus on their physical, mental, social, and
financial health. As a result, many employers have expanded their voluntary benefits offerings to address employees’ needs
and improve their attraction and retention efforts.

Among these offerings are disability benefits, which can provide guaranteed income or job protection to employees who are
unable to work due to serious illness or injury. The most common disability benefits are short-term disability (STD) and long-term disability (LTD) insurance. However, understanding the differences between STD and LTD benefits and other laws, such as
the Consolidated Omnibus Reconciliation Act (COBRA), can be complicated and difficult for employers to navigate.

This article provides a general overview of STD, LTD, and COBRA and explores how both types of disability insurance differ from
COBRA.

What are STD and LTD?

STD and LTD insurance are the most common forms of disability benefits.

Short-term Disability Insurance

STD insurance replaces all or a portion of an employee’s income due to a temporary disability. Under STD plans, employees
receive a percentage of their income, typically 40% to 70% of their base pay, but employers can allow employees to
supplement their STD benefits with paid sick leave or other benefits. An STD insurance policy is paid either fully or partially by
the employer, and the median length of STD insurance coverage is 26 weeks, according to the U.S. Bureau of Labor Statistics.

To qualify for STD insurance, an employee files a claim under their insurance policy. The employee must prove their illness or
injury qualifies as a disability under the plan’s terms. STD insurance generally requires employees to wait for a short period—
on average, seven days—before they start receiving benefits to discourage abuse and because many employers’ paid-time-off
benefits cover shorter absences than those covered by STD insurance. While STD insurance plans do not guarantee job
protection, employees may be entitled to it through their employers’ policies or under state and federal laws, such as the
Family and Medical Leave Act.

Employers offer STD insurance because it helps employees remain financially stable while recovering from an illness or injury,
allowing them to stay productive and focused when they’re physically able to return to work. Since the income employees
receive under STD insurance is paid by insurance companies, employers have the financial resources and flexibility to hire
temporary or contract workers to fill workforce gaps without experiencing high labor costs. In states that don’t require
employers to participate in disability income plans, employers can offer full, partial, or non-contributor STD insurance plans.

Long-term Disability Insurance

LTD insurance provides employees with income for long-term illnesses and injuries. Employees generally receive 60% to 80%
of their base pay; however, some employers’ LTD plans offer more limited income replacement benefits. Similar to STD,
employees receive income benefits until they are able to return to work or have exhausted policy limits. LTD benefits
requirements tend to be more rigorous than STD because workers need to demonstrate they’re unable to perform any job, not
just the job they were working before the illness or injury.

These plans often work together with STD, so when an employee exhausts their STD benefits, LTD benefits continue to provide
the employee with income. As with STD benefits, LTD does not provide workers with job protection. Employees who become
permanently disabled may continue to receive LTD benefits through their retirement date or until they’re eligible for Social
Security disability benefits.

What Is COBRA?

COBRA allows individuals to continue their group health plan coverage in certain situations. This law requires group health
plans maintained by private-sector employers with at least 20 employees to offer continuation coverage to covered employees
and dependents when coverage would otherwise be lost due to certain specific events. These events include the following:

Death
Termination
Reduction in employment hours below the plan’s eligibility requirements
Divorce or legal separation
Medicare eligible
Child’s loss of dependent status under the plan’s rules

COBRA sets rules for how and when continuation coverage must be offered, how employees and their families may elect
continuation coverage, and when continuation coverage may be terminated. Employers may require individuals to pay for
COBRA coverage. Group health coverage for COBRA participants is usually more expensive than coverage for active employees
because many employers pay a portion of the premium for active employees.

COBRA continuation applies to plans that qualify as group health plans as defined by the Employee Retirement Income
Security Act (ERISA). Under ERISA, a group health plan must be a plan, fund, or program that is established or maintained by an
employer and has the purpose of providing medical care. Health insurance plans, self-funded health plans, health maintenance
organizations, and prescription drug plans generally meet ERISA’s criteria for a group health plan. Medical care is defined as
care for the diagnosis, cure, mitigation, treatment, or prevention of disease and any other undertaking affecting any structure
or function of the body.

The Differences Between STD and LTD and COBRA

An employer is not required to offer COBRA continuation on a voluntary benefits plan if the plan does not qualify as a group
health plan and the plan is considered completely voluntary. STD and LTD benefits generally provide income replacement for
individuals who must take a leave of absence from work due to a qualifying condition instead of medical care. Because STD
and LTD typically do not provide medical care, they’re not subject to COBRA and would not be required to continue under
COBRA. However, although uncommon, if an STD or LTD insurance provided medical care, it may be considered a group health
plan under COBRA and subject to continuation coverage.

While STD and TLD benefits are generally not subject to continuation coverage under COBRA, an employee’s disability can
initiate COBRA requirements if it produces a qualifying event. For example, if an employee becomes disabled and doesn’t
return to work at the end of their disability leave or notifies their employer of their intent not to return, the employer’s plan will
determine whether this is a qualifying event. If this is determined a qualifying event, COBRA requires the employer to notify
the employee of their COBRA rights and provide the employee with the option to continue group health insurance coverage.

Summary

STD and LTD benefits can provide sick and injured employees with financial stability and peace of mind when they’re unable to
work. Understanding how these types of disability insurance differ from COBRA can help employers stay compliant and ensure
employees have the benefits they need and desire.

Have a Question?

Ask CEO & Founder Tony Maffeo