Disability insurance starts paying on day ninety. The rent is due on day one.
Most disability policies pay only after an elimination period, and the gap between losing a paycheck and receiving the first benefit is where employees get hurt. An income continuation account has the employer pay wages during that gap, so the policy takes over smoothly instead of starting from a hole.
Bridge the gap the policy leaves open.
The policy and the account are designed together, so that one hands off to the other on a known date.
The Elimination Period
A short-term disability policy typically starts after a set waiting period; long-term policies wait longer. Until the first benefit is due, an employee with no paid leave has no income at all.
Employer-Funded Wages
The employer funds an account that pays a share of the employee’s pay during the waiting period, up to a stated number of weeks. When the carrier approves the claim and begins paying, the account stops.
It Is Taxed as Wages
Payments are taxable wages to the employee and deductible to the employer. Social Security and Medicare tax and withholding apply, and payroll needs the account coded correctly from the first payment.
It Has to Coordinate With Other Leave
Paid sick leave, vacation and any state earned sick time rules can run in the same window. The plan should say which is used first, so that employees are not paid twice or shorted.
It Should Not Reduce the Insurance Benefit
Some policies offset benefits by other income received. The account is designed so that it covers the waiting period only, and the policy language is checked for offsets before launch.
Who Qualifies
A written rule, usually tied to a qualifying disability claim and a length of service, applied to everyone alike. Informal arrangements invite disputes about who got what.
Four decisions to make with the policy in hand.
The Waiting Period
How many days or weeks must pass before the account pays, and how long it pays. Both depend on the policy.
The Percentage
Full pay or a share. A share keeps the cost down and leaves a reason to return.
The Trigger
What counts as disability for the account, usually the same definition as the policy, so the carrier’s decision settles it.
The Records
A claim file with the dates, the policy decision and the payments, so every payment can be explained later.
The questions employers ask about income continuation.
Five questions that come before the policy is written.
Is the pay taxable?
Yes. It is wages for income tax and for Social Security and Medicare tax, and it is deductible to the employer.
Does it replace short-term disability insurance?
No. It covers the gap before the insurance starts. The policy remains the main protection.
Can it conflict with the policy?
It can if the policy offsets other income. We read the policy for offsets before the account is designed.
How long should it pay?
Only through the waiting period. After that, the carrier pays, and the account ends.
Does it need a written plan?
Yes. Eligibility, the percentage, the number of weeks and the trigger should all be written down and applied to everyone alike.
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General information about income continuation accounts, not legal or tax advice. Plan-specific questions belong with your tax adviser or counsel, and we will bring them in.
Related guides.
Disability Plan Coordination
How disability coverage fits with leave and pay.
Supplemental Life and Disability
Coverage employees can add on their own.
Leave and Absence Management
How leave rules interact across programs.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
Gross Income Defined (26 U.S.C. 61)
Compensation for services is income, which is why wage continuation payments are taxable.
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