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@101 CHAP ZZ
┌───────────────────────────────────────┐
│ DISABILITY INSURANCE │
└───────────────────────────────────────┘
Disability insurance is usually designed to replace part or all of
the income of a person who becomes disabled and is unable to continue
work for an extended period, usually 6 months or more, depending on
the terms of the policy. When obtaining disability coverage for your-
self or for your employees, be aware that there are various levels
of incapacity that will qualify as a compensable "disability" under
various disability policies:
. The least restrictive would be that the insured person is
unable to perform all the duties of his or her regular
occupation.
. At the other extreme, some policies require that the insured
be unable to perform ANY profession for which qualified, or
even that the insured be confined to a hospital in order to
collect benefits.
Disability policies also differ considerably in the waiting period
during which one must be disabled before being eligible to collect
benefits, and the period for which benefits will be paid in the case
of an extended disability. For example, many of the typical group
disability policies have a lengthy waiting period and then only pay
benefits for a maximum of 2 years. The better policies (which often
are not significantly more expensive) often provide benefits until the
insured recovers or reaches age 65, for example.
Disability insurance is treated very favorably for tax purposes. A
corporation that provides disability insurance for its employees is
allowed to deduct the premiums it pays, while the employee is not
taxed on the value of such benefits. However, no deduction is allowed
in the case of sole proprietor or for the partners in a partnership.
Similarly, while an S corporation may claim a deduction for disability
insurance on any 2% or greater stockholder, any such amount will be
taxable compensation to the stockholder/employee, who will not be
able to claim any offsetting deduction for the insurance.
The downside of this favorable tax treatment for C corporation employees
is that if the employee who received such coverage as a tax-free fringe
benefit ever collects benefits under the policy, such benefits will be
fully taxable. By contrast, if the premiums were non-deductible (as in
the case of a sole proprietor's disability insurance for himself or
herself), any disability benefits that may be received will be exclud-
able from taxable income. Nevertheless, disability insurance is an
important tax-free fringe benefit that can be offered by an employer,
or that you can provide for yourself if you are an employee-owner of a
C corporation.
@CODE: HI
@CODE:NF
┌───────────────────────────────────────────────┐
│ HAWAII TEMPORARY DISABILITY INSURANCE (TDI) │
└───────────────────────────────────────────────┘
Hawaii is a bit unusual, in that it REQUIRES all employers to provide
TDI coverage to their employees. TDI benefits are primarily an income
continuation or sick leave benefit, for up to 26 weeks, for workers who
are unable to work. While workers' compensation insurance (also manda-
tory in Hawaii) covers job-related injuries, TDI is a wage replacement
system for employees who become unable to work due to off-the-job
disabilities. (Hawaii also REQUIRES employers to provide medical
insurance coverage for employees.)
An employee does not become eligible for TDI coverage unless working at
least 20 hours a week for at least 14 weeks and earning wages of at
least $400 during the four most recently completed calendar quarters.
Coverage is also not required for newspaper deliverers under 18 years
of age; insurance and real estate agents working on commission; for
individuals working for a son, daughter, or spouse; or for children
under age 21 working for their father or mother.
An employer may satisfy its TDI obligation by any of the following:
. By obtaining disability insurance from an "approved" insurer;
. By adopting a sick leave policy that is approved by the Dept. of
Labor and Industrial Relations, Disability Compensation Division;
or,
. Under a collective bargaining (union) agreement which contains
sick leave benefits at least as favorable as those required by
the TDI law.
As an employer in Hawaii, you may require covered employees to pay part
of the cost of TDI coverage. You can deduct from the employee's wages
one-half of the premium cost, but not more than 0.5% of the worker's
weekly taxable wages. However, the maximum wage amount on which the
deduction may be calculated is limited by law to 1/52 of the statewide
average annual wage, as determined each year by the Dept. of Labor and
Industrial Relations (roughly $400 at present).
For specific details on the state law, see Chapter 11.5 of the book
"STARTING & OPERATING A BUSINESS IN HAWAII." or obtain the "TDI
Handbook for Employers and Insurance Companies" from the Disability
Compensation Division of the Hawaii Dept. of Labor and Industrial
Relations.