DISABILITY BENEFITS: WHAT THEY COST AND WHO PAYS.
Neither plan replaces full pay. Many plans replace somewhere around half to 70 percent of pay, only after a waiting period called the elimination period, and only up to a maximum. Short-term disability usually starts after a week or two and lasts a few months. Long-term disability usually starts after about three months and lasts years. Both are priced as a rate per $100 of covered payroll, so the cost is a small percent of payroll that you can turn into a cost per employee and a cost per hour in the labor burden. Workers comp covers job injuries and these plans cover the rest. The owner is often the one person with neither.
Disability coverage is a small line in the burden and a large line in what happens when someone cannot work. This page explains what each plan replaces, how the waiting and benefit periods work, how the premium is priced, and who pays. It does not say which plan to buy. A licensed broker or benefits advisor places the plan.
WHAT IT MEANS.
Short-term disability and long-term disability are insurance benefits that pay an employee part of their pay when an illness or injury that did not happen on the job keeps them from working. Short-term pays for weeks or months. Long-term starts later and can pay for years.
Plan terms, tax rules and state law differ. The numbers printed here come from published ranges and from example math with invented inputs. The policy or plan document is what controls, and a tax professional answers the tax questions.
For a contractor, the cash question is simple. A crew member has surgery after a weekend accident or gets a serious illness. Workers comp does not apply because it did not happen on the job. Without disability coverage, the paycheck stops, the family calls the office, and the owner decides what to do with no plan. The plan decides it ahead of time.
HOW DISABILITY COVERAGE WORKS.
What each plan replaces
Short-term disability replaces part of an employee's pay for a limited time. Carrier education pages and public plan summaries commonly show 50 to 70 percent of pre-disability pay. Long-term disability replaces part of pay for much longer, commonly 50 to 60 percent. Benefits are capped at a maximum, so a high earner can get a smaller share than the percentage suggests. The plan document sets the percentage and the cap.
The waiting period and the benefit period
The elimination period is the number of days an employee is disabled before benefits begin. For short-term plans it is often 14 days, and it can be anywhere from 7 to 30. For long-term plans, 90 days is the most common. The benefit period is how long benefits can be paid. Short-term plans commonly pay for three to six months and sometimes up to a year. Long-term plans commonly pay for 5 years, 10 years, 20 years or to retirement age. During the wait there is no disability payment, so the employee uses paid time off or goes without pay. SPM checks that the end of the short-term benefit lines up with the start of the long-term benefit, because if they do not, there are weeks with no payment.
How it differs from workers comp
Workers comp is for injuries and illnesses from the job, and nearly every state requires an employer with employees to have it. Disability coverage is for the injury or illness that happened off the job. When a person is hurt on the job, the two can overlap, and one benefit may reduce the other. That depends on state law and on the wording of the disability plan. One state's rules can be the opposite of another's, so the owner asks the broker how the two coordinate. See the workers comp renewal page for how that premium is built.
State disability programs
A handful of states, including California, Hawaii, New Jersey, New York and Rhode Island, require disability coverage for non-work illness or injury for private employees. Most of those states let an employer use an approved private plan in place of the state fund, and Rhode Island uses its state plan. Who pays differs, and in several states employee payroll deductions fund part or all of it. A contractor with crews in one of these states checks the state agency's rules first, because the state benefit may already do the job of short-term disability.
How the premium is priced
Group long-term disability is commonly priced as a rate per $100 of covered monthly payroll. The premium is the covered monthly payroll times the rate, divided by 100. Public plan rate sheets show the rate stepping up with age, and the rate changes with the benefit percentage and the length of the wait. A longer wait generally costs less. Covered earnings are often capped. Carriers quote in different units, so SPM asks the broker to restate every quote as a rate per $100 of covered payroll and as dollars per employee per month. Whether overtime, bonuses or per diem count as covered pay is set by the plan.
Who pays, and what that does to taxes
The employer can pay all of the premium, the employee can pay all of it, or they can split it. As summarized in IRS Publication 525, benefits from a plan the employer paid for are generally taxable to the employee, benefits from a plan the employee paid for with after-tax dollars are generally not, and when the cost is split, the employer-paid share is the taxed share. Premiums an employee pays before tax through a cafeteria plan are treated as employer-paid. Tax rules apply and they differ by situation, so the owner checks with a tax professional and the payroll provider before setting up deductions.
The owner is often the one person with no coverage
In a small contractor, the owner is often the estimator, the project manager, the person who signs the pay applications and the one who knows the bank. Employees may have a plan while the owner has nothing, or has a plan built on a small salary. If the owner is out for six months, the business keeps paying rent, equipment notes, insurance and payroll, and nobody is doing the owner's job. Disability income pays the person. Key person coverage is bought by the business and pays the business. They solve different problems, and the key person page covers the second one.
WHAT IT LOOKS LIKE IN DOLLARS.
Take 20 employees with $1,200,000 of covered payroll a year, or $100,000 a month. Say the short-term rate is $0.50 per $100 of covered monthly payroll and the long-term rate is $0.30 per $100. Short-term is $100,000 divided by 100 times 0.50, which is $500 a month or $6,000 a year. Long-term is $300 a month or $3,600 a year. Together that is $9,600 a year. These rates are invented to show the method. They are not quotes and not typical prices.
In the example, $9,600 across 20 employees is $480 per employee per year. At 2,080 paid hours each, which is 41,600 hours, it is about $0.23 per hour, and about 0.8 percent of payroll. For context, the Bureau of Labor Statistics reported that employers in private industry paid an average of about 10 cents per hour worked for short-term disability and about 5 cents for long-term disability in December 2023. That is an all-industry average, not a construction figure and not a quote.
Say an owner takes $150,000 a year. A plan replacing 60 percent would pay $90,000 a year, or $7,500 a month, if the plan allows that much pay to be covered. A cap would lower it. With no plan, the benefit is $0 and the company still has its fixed overhead every month. The comparison is between a small premium and a month with no owner income and the same bills.
WHAT WE CHANGE.
An employer-paid premium is a cost on every hour of labor. SPM converts it to a cost per hour and adds it to the burden, so bids and change orders include it. Employee-paid premiums are booked separately from the employer cost. See the labor burden page.
SPM maps the elimination period against the payroll calendar and the paid time off policy, so the owner knows what an absence costs in the weeks before benefits start. That is a cash question, and it is answered before the absence happens.
SPM asks the broker for each quote as a rate per $100 of covered payroll, the covered payroll used, the cap, the elimination period and the benefit period. Quotes in the same units can be compared with last year's renewal and with the budget.
At the monthly meeting SPM puts the owner's pay, the company's fixed costs and the months the business could cover without the owner on one page. The owner takes that page to the broker and the tax professional. The key person page covers the business side.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing. No payroll. The one-time onboarding fee is right here in the table.
| Last 12 months revenue | Monthly fee | One-time onboarding |
|---|---|---|
| Up to $1M | $1,900 to $2,900 | $1,000 |
| $1M to $3.5M | $2,600 to $3,900 | $1,500 |
| $3.5M to $6.5M | $3,800 to $5,700 | $3,000 |
| $6.5M to $9.5M | $5,100 to $7,100 | $4,500 |
| $9.5M to $12.5M | $6,100 to $8,500 | $6,000 |
| $12.5M to $15.5M | $7,400 to $11,000 | $7,500 |
| $15.5M to $18.5M | $9,400 to $13,500 | $9,000 |
| $18.5M+ | Quoted individually | Quoted individually |
The onboarding fee covers migrating your books back to the start of your last taxable year and getting you fully operational in 60 days. It's billed once, with your first invoice. It's the same for all three tiers. Your first month is prorated, and your monthly engagement starts on the first of the first full month.
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items. The onboarding fee is right here in the table.
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