Employer Short-Term Disability Insurance: Coverage, Costs & Compliance

Short-term disability is the benefit employees are most likely to actually use, and the one employers most often assume is covered by something else. It is not covered by something else. In Michigan there is no state programme underneath it, sick time does not stretch far enough, and unpaid leave is a right to keep a job rather than a source of income.

This guide covers how a short-term disability plan is built, the tax choice that changes what employees receive, how the benefit interacts with leave law, and the gap that opens between short-term and long-term coverage when the two are bought separately.

What Fills the Gap in Michigan, and What Does Not

Only six jurisdictions run a state temporary disability insurance programme — California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico. Michigan is not among them. There is no state fund a Michigan employee can claim against.

Three things get mistaken for coverage:

Earned sick time. Michigan’s Earned Sick Time Act requires 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 everyone else. That is one to two weeks. It is built for a flu, not a surgery.

FMLA. Family and Medical Leave Act leave is unpaid. It protects the job and the health coverage; it pays nothing. It also only applies at employers with fifty or more employees, with a second test of fifty employees within seventy-five miles of the worksite before any individual qualifies.

Workers’ compensation. Covers only injury or illness arising out of employment. Most short-term disability claims — surgery, illness, childbirth recovery, a car accident on a Saturday — are not work-related and fall entirely outside it. Benefits work best when they are planned as part of a broader total rewards strategy alongside pay.

What remains is short-term disability, salary continuation, or nothing.

How a Short-Term Plan Is Built

The elimination period is how long an employee must be disabled before benefits start — commonly 7 or 14 days, sometimes zero days for accident and a short wait for illness. A longer wait costs less and pushes more of the burden onto whatever paid time off the employee has.

The benefit percentage is usually around 60% of pre-disability earnings, subject to a weekly maximum. As with long-term coverage, the weekly cap is what bites for higher earners.

The benefit duration runs from the end of the elimination period, typically for 13 to 26 weeks. This number is the one to write down, because it has to meet the long-term plan’s elimination period exactly.

The definition is almost always own-occupation for the whole benefit period — a far more generous standard than long-term coverage applies, and one reason short-term claims are approved more readily.

Childbirth Is the Most Common Claim

For most employers, recovery from childbirth is the single largest source of short-term disability claims. Any plan decision made without that in mind is being made blind.

The mechanics matter. The disability period is the medical recovery, not the bonding time — commonly around six weeks for an uncomplicated vaginal delivery and eight for a caesarean, with longer where there are complications. Parental leave beyond that recovery is a separate policy question, and a benefit the plan does not pay.

Two points employers should be clear about. First, if you offer short-term disability for other conditions, pregnancy-related disability has to be covered on the same terms — same elimination period, same percentage, same duration. Treating it differently is a discrimination problem, not a plan design choice. Second, the elimination period applies to childbirth like anything else, so an employee with a seven-day wait is unpaid for that week unless paid time off covers it.

Employers who want to do better here often layer a paid parental leave policy on top of the disability benefit rather than trying to make the disability plan do work it was not designed for.

Short-Term Disability Insurance: Employer Coverage, Cost & Compliance

The rule is the same as for long-term disability, and it is the same trap.

If the employer pays the premium, benefits are fully taxable. If the employee pays with after-tax dollars, benefits are tax-free. If the employee pays pre-tax through a cafeteria plan, the IRS treats the premium as employer-paid and the benefit is fully taxable.

There is an administrative consequence employers miss: taxable short-term disability benefits are third-party sick pay, which brings reporting and withholding obligations. Whether the carrier handles that or hands it back to your payroll team is a question to settle when the plan goes in, not when the first claim pays.

Insured, Self-Funded or Salary Continuation

Short-term disability is inexpensive and its claims are frequent and small, which makes the funding question different from long-term coverage.

Insured transfers the risk and, more valuably, the claim decisions. A carrier tells an employee their claim is denied. A manager does not have to.

Self-funded can be cheaper for a larger employer with predictable claims, but the administration and the adjudication come back in-house. That second part is the one employers underestimate.

Salary continuation — paying a percentage of salary from payroll for a set period, often graded by tenure — is simple and generous-feeling, and it has no external check on whether someone is genuinely disabled. It works best as a short bridge before an insured plan takes over.

Mind the Gap to Long-Term

The most valuable check in this entire line takes about five minutes.

Write down two numbers: how many weeks your short-term plan pays, and how many days the long-term plan waits before it starts. If short-term runs 13 weeks and long-term waits 180 days, there is roughly a three-month hole where a seriously ill employee has no income at all.

That gap appears when the two plans are bought at different times from different carriers, which is the normal way it happens. It is invisible on both benefit summaries, and it stays invisible until someone falls into it.

Questions We Get

Does Michigan require short-term disability coverage?

No. Only California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico run state temporary disability programmes. A Michigan employee who cannot work has no state fund to claim against, so the only income sources are what the employer provides and whatever they bought individually.

Does earned sick time cover this?

Not for anything serious. Michigan’s Earned Sick Time Act provides one hour 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, not for surgery or a long illness.

Is FMLA leave paid?

No. FMLA protects the job and continues health coverage; it pays nothing. It also applies only at employers with fifty or more employees, and an individual employee must additionally work at a site with fifty employees within seventy-five miles. Job protection and income replacement are separate problems.

What is the elimination period?

How long an employee must be disabled before benefits begin — commonly 7 or 14 days, sometimes zero for an accident with a short wait for illness. A longer elimination period lowers premium and shifts that time onto the employee’s paid time off. It applies to childbirth the same as anything else.

How long does short-term disability pay?

Typically 13 to 26 weeks from the end of the elimination period. That duration is the number to check against your long-term plan’s elimination period, because any mismatch between the two becomes a period with no coverage at all.

Is short-term disability taxable?

It depends on who paid the premium. Employer-paid premiums make benefits fully taxable. Employee-paid with after-tax dollars makes them tax-free. Premiums paid pre-tax through a cafeteria plan are treated as employer-paid, so benefits are taxable. Taxable benefits are third-party sick pay, which carries reporting and withholding obligations worth settling before the first claim.

How does it work for maternity leave?

Short-term disability covers the medical recovery from childbirth — commonly around six weeks for an uncomplicated delivery and eight for a caesarean — not bonding time afterward. If a plan covers other conditions it must cover pregnancy-related disability on the same terms. Paid parental leave beyond the recovery period is a separate policy, not something the disability plan pays.

Should we self-fund it?

Short-term disability is inexpensive, and the strongest argument for insuring it is not the money — it is that a carrier makes the claim decisions. Self-funding brings adjudication in-house, which means someone at your company decides whether a colleague is genuinely disabled. Employers consistently underestimate how uncomfortable that is.

What is salary continuation and is it enough?

Paying a percentage of salary directly from payroll for a set period, often graded by tenure. It is simple and feels generous, but there is no external check on whether an employee is genuinely disabled and no cap on how long goodwill lasts. It works best as a short bridge before an insured plan begins.

What is the one thing to check this year?

Two numbers: the weeks your short-term plan pays and the days your long-term plan waits. If short-term runs 13 weeks and long-term waits 180 days, there is about a three-month gap with no income. It is invisible on both benefit summaries and it is the most common structural flaw in this line.

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.

Unhappy with your current broker? Switch to CFH. Your employees won’t notice. You will.