How to Manage Changes to California State Disability Insurance

If you are a high-wage earner in California, you may notice a a larger portion of your salary are being held back under disability insurance this year compared to last year.

This is due to California’s bill SB 951 which eliminates the taxable wage base limit for State Disability Insurance (SDI) contributions, meaning employees must now pay SDI tax on all taxable wages.

While both employers and employees are used to SDI contribution rates and salary limits changing every year — the 2023 salary cap was $153,164 — the removal of the salary cap is new for 2024.

Some California employers are considering offering a private or voluntary disability insurance (VDI) option to enhance benefits and save their employees money. But how do you determine if it’s right for your organization?

Learn more: Why Employers Should Add Child Disability Insurance to Their Benefits Suite

What are my other disability insurance options?
Instead of participating in the California SDI program, employers may apply to the California SDI program. Employee Development Service for VDI — a voluntary short-term disability and family leave plan. It provides short-term wage replacement disability insurance and family leave benefits similar to SDI.

With this option, employers can design a private plan that enhances employee benefits and short-term disability (STD) options while capping contributions for high-earning employees.

Who is this plan for?
Not all disability insurers in California offer this type of VDI plan yet, but those that do typically offer it as a self-insured option. This means that, like a self-funded medical plan, the employer assumes the claims and experience risks.

This type of plan might be appropriate for organizations that have:

• A significant number of California-based employees (although each carrier has different requirements, many prefer a group of 500+ employees).
• A large segment of high-wage employees (organizations in the legal, financial or technology sectors could be good candidates).
• Low incidence and low duration of disability experience.

Many insurers will also require employers to have long-term disability (LTD) insurance or other coverage before adding a VDI plan. This requirement helps simplify administration and maintain a positive employee experience.
Learn more: Does your disability insurance cover long COVID cases? What are the risks for employers and employees?

Things to Consider Before Setting Up a Voluntary Disability Insurance Plan
There are several factors to consider when deciding whether to offer a VDI plan:

Basic requirements
First, the VDI plan must be offered to all eligible California employees. It must provide better benefits in at least one area than the SDI plan and cannot cost employees more than the SDI. To offer a VDI plan, you must obtain written approval from a majority of your employees.

Installation and registration
By law, VDI can never cost more or pay less in benefits than SDI. Employees cannot opt ​​out of coverage; they must participate in either the VDI plan or SDI. Although employees can opt out of the VDI plan and choose SDI coverage, they can opt in or out of VDI on a quarterly basis. If employees choose the VDI plan, they must be provided with a written document outlining their benefits.

Learn more: Benefits Expert Advice: Think of Health Care as an Investment, Not an Expense

Cost and administration
When you offer a self-insured VDI plan, the employer assumes the risk and funds all claims. If the plan is in deficit, your organization is financially responsible for covering claims and expenses. Administrative costs associated with managing the plan will include a bond/letter of credit, state assessment fees (paid quarterly), and the TPA or operator’s administrative fees.

In the future, the VDI plan will need to be updated to reflect any increases in benefits paid to the SDI by the state due to new laws or regulations that are approved. In addition, the plan is subject to financial and claims audits conducted by the state.

Your organization will also need to establish a separate bank account and reconciliation process, which may result in minor changes to payroll reporting.

How to decide if it’s right for your organization
Partnering with a benefits consultant and disability insurer that offers VDI can help you conduct a feasibility study and determine if a VDI plan is right for your organization.

Many employers were reluctant to be the first to implement this new plan at the beginning of the year. However, interest is slowly growing among some California employers. And as more high-income employees notice the SDI deductions from their paychecks, we expect more employers to consider privatizing disability in California.