How to navigate changes to California state disability insurance

If you are a high-wage employee in California, you may notice a a larger portion of your salary are withheld for disability insurance this year compared to last year.

This is because California Bill, SB 951 removes the basic taxable wage limit for State Disability Insurance (SDI) contributions, meaning that employees must now pay SDI tax on all taxable wages.

While both employers and employees are used to SDI contribution rates and salary caps changing every year – the salary cap in 2023 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?

Read more: Why employers should add disability insurance to their benefits package

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

With this option, employers can design a private plan that improves benefits and enhances the employee short-term disability (STD) option, while limiting contributions for higher-wage workers.

Who is this plan suitable for?
Not all California disability carriers offer this type of VDI plan yet, but those that do usually offer it as a self-insured option. This means, like self-funding a medical plan, the employer assumes the claims and experience risk.

This type of plan might make sense for organizations that have:

• A significant number of employees in California (while each operator has different requirements, many prefer a pool of 500+ employees).
• A large segment of high-wage earners (law, finance, or technology organizations might be good candidates).
• Low incidence of disability and lasting experience.

Many carriers will also require employers to have long-term disability (LTD) insurance or another line of coverage before adding a VDI plan. This requirement helps streamline administration and maintains a positive employee experience.
Read more: Does your disability insurance cover long-term COVID? What is at stake for employers and employees

What to consider before implementing 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 employees in California. It must provide better benefits in at least one area compared to 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.

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

Read more: Advice from a benefits expert: View healthcare as an investment, not an expense

Cost and administration
When offering a self-insured VDI plan, the employer assumes the risk and funds all claims. If the plan has a shortfall, your organization is financially responsible for covering the damages and expenses. Administrative fees for running the plan will include a security bond/letter of credit, a state assessment fee (paid quarterly) and TPA or carrier administrative fees.

In the future, the VDI plan must be updated to accommodate any increases in State SDI benefits as a result of new legislation or approved regulations. In addition, the plan is subject to state financial and claims audits.

Your organization will also need to set up 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 carrier that offers VDI can help you conduct a feasibility study and determine if a VDI plan is right for your organization.

Many employers did not want to be the first in line to implement this new plan at the beginning of the year. However, interest is slowly growing among certain California employers. And as more high-income workers see SDI payroll deductions, we expect even more employers to consider privatized California disability.