May 15, 2008

SICK-LEAVE PLANS : Eligibility, Benefits

Employers use two approaches to provide short-term disability benefits to employees: sick-leave plans and short-term disability income insurance plans. Sick-leave plans, often called salary continuation plans, are uninsured and generally fully replace lost income for a limited period of time, starting on the first day of disability. In contrast, short-term disability income insurance plans usually provide benefits that replace only a portion of an employee's lost income and often contain a waiting period before benefits start, particularly for sickness. While it is impossible to obtain precise statistics, surveys indicate that about half the employees with short-term coverage obtain benefits under sick-leave plans, about one-quarter under insured plans, and about one-quarter under plans that combine the two approaches.

Traditionally, many sick-leave plans were informal, with the availability, amount, and duration of benefits for an employee being at the employer's discretion. Although some plans used by small firms or for a limited number of executives still operate this way, informal plans are generally inappropriate. There is a possibility that the Internal Revenue Service (IRS) will consider benefit payments to be either a gift or a dividend and therefore not tax deductible by the employer. In addition, an informal plan increases the likelihood of suits brought by persons who do not receive benefits. As a result, the vast majority of sick-leave plans are now formalized and have specific written rules concerning eligibility and benefits.

Almost all sick-leave plans are limited to permanent full-time employees, but benefits may also be provided for permanent part-time employees. Most plans require that an employee satisfy a short probationary period (commonly one to three months) before being eligible for benefits. Sick-leave plans may also be limited to certain classes of employees, such as top management or nonunion employees. The latter is common when the union employees are covered under a collectively bargained, but insured, plan.

Most sick-leave plans are designed to provide benefits equal to 100 percent of an employee's regular pay. Some plans, however, provide a reduced level of benefits after an initial period of full pay.

Several approaches are used in determining the duration of benefits. The most traditional approach credits eligible employees with a certain amount of sick leave each year, such as ten days. The majority of plans using this approach allow employees to accumulate unused sick leave up to some maximum amount, which rarely exceeds six months (sometimes specified as 180 days or 26 weeks). A variation of this approach is to credit employees with an amount of sick leave, such as one day, for each month of service. Table 1 is an example of a benefit schedule that uses this variation.

Table 1: Benefit Schedule Based on Months of Service

Another approach, illustrated in Table 2, bases the duration of benefits on an employee's length of service.

Table 2: Benefit Schedule Based on Length of Service

An alternative to this approach provides benefits for a uniform length of time to all employees, except possibly those with short periods of service. However, benefits are reduced to a level less than full pay after some period of time that is related to an employee's length of service. Table 8-3 is an illustration of this increasingly common approach.

Table 3: Benefit Schedule With Varied Coverage Based on Months of Service

In some instances, an employee is not eligible for sick-leave benefits if he or she is eligible for benefits under social insurance plans, such as workers' compensation. However, most sick-leave plans are coordinated with social insurance programs. For example, if an employee is entitled to 100 percent of pay and receives 60 percent of pay as a workers' compensation benefit, the salary sick-leave will pay the remaining 40 percent.

A problem for the employer is how to verify an employee's disability. In general, the employee's word is accepted for disabilities that last a week or less. Most sick-leave plans have a provision that benefits for longer periods will be paid only if the employee is under the care of a physician, who certifies that the employee is unable to work.


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