Long-term disability protects the thing every other benefit assumes: the paycheque. It is also the benefit employees understand least, partly because the terms that decide a claim sit six pages into a certificate nobody reads until they need it.
This guide covers how LTD is structured, the four provisions that decide whether a claim pays, the tax choice most employers make by accident, and what Michigan employers in particular need to know.
Michigan Has No State Disability Program
Start here, because it changes the stakes. Only six jurisdictions run a state temporary disability insurance programme: California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico. Michigan is not one of them.
For a Michigan employee who cannot work for an extended period, there is no state benefit waiting underneath. The options are what the employer provides, what the employee bought individually, and Social Security Disability Insurance — which has a strict definition, a five-month waiting period, and a decision process measured in months.
Michigan’s Earned Sick Time Act does not fill the gap either. It provides one hour of paid sick time per thirty hours worked, capped at 40 hours a year for employers with ten or fewer employees and 72 hours for larger ones. That is one to two weeks, designed for short absences. It is not income replacement for a serious illness.
The Four Provisions That Decide a Claim
The elimination period. How long the employee must be disabled before benefits begin, commonly 90 or 180 days. A longer period costs less and creates the gap short-term disability is meant to bridge — the two products should be designed together, not bought years apart.
The benefit percentage and cap. Typically around 60% of pre-disability earnings, subject to a monthly maximum. The cap is what matters for higher earners: a plan paying 60% to a $10,000 monthly maximum replaces 60% of a $150,000 salary but a far smaller share of a $400,000 one.
The definition of disability. This is the provision that decides claims. An own-occupation definition pays when the employee cannot perform their own job. An any-occupation definition pays only when they cannot perform any job they are reasonably suited for. Most group plans use own-occupation for an initial period, commonly 24 months, then switch. A surgeon who can no longer operate but could teach is paid under the first definition and likely not the second.
The pre-existing condition limitation. Most group LTD excludes conditions treated during a lookback window before coverage began, for a stated period afterward. A new employee managing an existing condition may not be covered for it in year one. This is the most common reason a claim an employee expected to be paid is denied.
The Tax Choice Most Employers Make by Accident
Who pays the premium determines whether the benefit is taxed, and the difference is large enough to change what the employee actually receives.
Employer-paid premium: the benefit is fully taxable. A 60% benefit becomes roughly 45% after tax, depending on the bracket.
Employee-paid with after-tax dollars: the benefit is tax-free. The full 60% arrives.
Employee-paid pre-tax through a cafeteria plan: the benefit is fully taxable. The IRS treats premiums paid pre-tax as employer-paid. This is the one that catches employers out — running LTD premiums through Section 125 feels like a favour to employees and quietly converts a tax-free benefit into a taxable one.
Where both parties contribute and the employee pays their share after tax, only the portion attributable to the employer’s payments is taxable.
There is a deliberate strategy available, sometimes called a gross-up: the employer imputes the premium as income, the employee pays tax on a small premium now, and the benefit arrives tax-free if it is ever needed. Paying tax on a few hundred dollars of premium to protect tens of thousands of tax-free benefit is usually the better trade. It has to be set up on purpose.
Offsets: What the Plan Subtracts
Group LTD is almost always an integrated benefit. The plan pays the difference between other income sources and the promised percentage, rather than paying on top of them.
Common offsets include Social Security disability benefits, often including family benefits; workers’ compensation; state programmes where they exist; retirement plan disability benefits; and in some contracts, earnings from a partial return to work. Most plans also require the employee to apply for Social Security disability and will estimate the offset if they do not.
Employees who read “60% of salary” and plan around it are often surprised. The honest framing is that the plan guarantees a floor of total income, not an additional 60%.
Short-Term and Long-Term Belong Together
These are two halves of one product, and buying them years apart from different carriers is how gaps appear.
Short-term disability covers from the first days of disability, typically for 13 to 26 weeks. LTD picks up when its elimination period ends. If short-term runs 13 weeks and the LTD elimination period is 180 days, there is roughly a three-month hole where an employee has neither. That hole is invisible until someone falls into it.
Check the two numbers against each other. It is the most valuable five minutes available in this line.
Participation and Eligibility
Employer-paid LTD covers an entire eligible class automatically, which avoids anti-selection and generally produces better pricing and underwriting terms. Voluntary LTD requires meeting a participation minimum, and because the people most likely to elect it are those most likely to claim, carriers price accordingly.
Class carve-outs are legitimate and common — executive classes with richer benefits or more favourable definitions. They need to be defined by objective job criteria rather than by individual name. Because health plans cannot favor executives, many employers use insured executive benefits, such as supplemental disability and life coverage, to do that job instead.
Questions We Get
Does Michigan require employers to provide disability coverage?
No. Only California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico run state temporary disability insurance programmes. Michigan does not, so there is no state benefit underneath an extended absence — only what the employer provides, what the employee bought individually, and Social Security disability.
Does Michigan’s Earned Sick Time Act cover a long absence?
No. It provides one hour of paid sick time per thirty hours worked, capped at 40 hours a year for employers with ten or fewer employees and 72 hours for larger employers. That is one to two weeks, intended for short absences, not income replacement for a serious illness or injury.
Are long-term disability benefits taxable?
It depends entirely on who paid the premium. Employer-paid premiums make the benefit fully taxable. Employee-paid premiums with after-tax dollars make it tax-free. Premiums paid pre-tax through a cafeteria plan are treated as employer-paid, so the benefit is fully taxable — which catches out employers who route LTD through Section 125 as a favour to employees.
What is the difference between own-occupation and any-occupation?
Own-occupation pays when the employee cannot perform their own job. Any-occupation pays only when they cannot perform any job they are reasonably suited for by education, training and experience. Most group plans use own-occupation for an initial period, commonly 24 months, then switch. The switch is when many claims end.
Why would a claim be denied for a pre-existing condition?
Most group LTD excludes conditions treated during a lookback window before coverage began, for a stated period afterward. A newly hired employee managing an existing condition may not be covered for it in the first year. It is the most common reason a claim an employee expected to be paid is not.
If the plan pays 60%, why is the cheque smaller?
Two reasons. Group LTD is normally integrated, meaning it pays the difference between other income sources and the promised percentage rather than paying on top — Social Security disability, workers’ compensation and similar benefits are subtracted. And if the employer paid the premium, the benefit is taxable. Together these can turn 60% into something closer to 40%.
How do short-term and long-term disability fit together?
Short-term covers from the first days of disability, typically for 13 to 26 weeks. Long-term begins when its elimination period ends, commonly at 90 or 180 days. If short-term runs 13 weeks and long-term waits 180 days, there is roughly a three-month gap with no coverage. Checking those two numbers against each other is the most valuable review available in this line.
Should LTD be employer-paid or voluntary?
Employer-paid covers the whole eligible class automatically, avoids anti-selection and produces better pricing and underwriting. Voluntary requires hitting a participation minimum and attracts the employees most likely to claim, which carriers price for. Employer-paid also makes the benefit taxable, which is worth weighing against a deliberate gross-up arrangement.
What is a gross-up and is it worth doing?
The employer imputes the LTD premium as taxable income to the employee, so the benefit arrives tax-free if it is ever needed. The employee pays tax on a small premium now instead of tax on a large benefit later. For most workforces the arithmetic favours it, but it has to be set up deliberately — it does not happen by default.
Where does the monthly benefit cap matter most?
For highly compensated employees. A plan paying 60% to a $10,000 monthly maximum replaces 60% of a $150,000 salary but a much smaller share of a $400,000 one. If you have executives or high earners, check where the cap begins to bite before assuming the stated percentage applies to everyone.
General information for Michigan employers, not legal or tax advice. Plan-specific questions belong with your counsel or accountant, and we will bring them in.
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