Short-term disability funding: What’s right for your organization?

Know your options

When it comes to STD funding, most employers can choose between fully insured or employer-paid, which can take the form of Advice to Pay (ATP) or Administrative Services Only (ASO). Each option comes with its own level of employer involvement, cost structure, and control over claims decisions.

Here are some key differences between the three main options:

1. Fully insured

This is generally the most hands-off approach for the employer. The organization selects a plan from the menu of options that meets their desired plan needs and budget and they pay a set premium. For that, the insurance carrier pays the claims and acts as the fiduciary, so they take on the legal and financial responsibility of administering the coverage. This model often offers enhanced cost stability and ease of administration for employers.

When looking at claims administration, as the fiduciary, the insurance carrier is responsible for each step of the claim administration process — from adjudicating and paying claims to managing appeals. Employers have access to claim status and payment information, and will still have some responsibilities, such as recognizing the need for a claim, directing the employee to work with the carrier, and confirming eligibility details for the carrier upon request.

2. Advice to Pay

With ATP, the organization self-funds the STD benefits but partners with a carrier for claims guidance. The carrier reviews incoming claims and provides the employer with claims decision and duration recommendations, as well as calculations of potential benefit payments. Ultimately, since the employer is the fiduciary in this model, it's the employer who issues payments to employees, usually through payroll. The employer can have more freedom to provide richer benefits than the fully-insured “menu,” and to pay employees when the carrier may still view the claim as pending. This model allows the employer, acting as both claims administrator and fiduciary, to retain control over claim decisions and payments, while still leveraging the carrier’s expertise and support.

3. Administrative Services Only

Similar to ATP, ASO is another self-funded model, but with a bit more support for the employer. The employer still funds the claims and can offer a more generous plan design than may be available if benefits were fully insured, but the carrier goes a step further by providing checks to employees on the employer's behalf. While the employer retains fiduciary responsibility and makes the final determination on claim eligibility, the carrier handles the actual payments, resulting in a lighter day-to-day administrative load compared to ATP.

Integration with paid leave laws

Paid Family and Medical Leave (PFML) laws have significantly expanded in recent years, as many states have either implemented, passed, or proposed some form of PFML legislation. PFML laws are also constantly evolving across the country.

Nelson shared that “State mandated programs, such as Paid Family Medical Leave and State Mandated Disability, can have an impact on disability programs and company paid leave programs. So, oftentimes they're going to impact how much is paid out by a disability plan as well as the rates that are going to be charged for the disability plans.”

Consider how your STD program may integrate with state mandated programs as well as company-paid leaves like parental or family care leave. The STD program can complement and enhance the required benefits under a state plan.

Given the complexity of the national landscape, it’s important for employers to look at how their STD program will interact with these benefits, and to choose a plan design and funding method accordingly. When done correctly, the STD program can complement and enhance the required benefits under a state plan, leading to a better benefits package and claims experience for employees.

Self-funded vs. fully insured

Nelson highlighted key differences and potential advantages of the self-funded and fully insured approaches:

“Self-funded is going to provide potential for richer benefits,” he explains. “You can pay your benefits through payroll if you’d like, or you can do the ASO model where the carrier manages it. There’s going to be potential for final control over managing the payment decisions, and HR is going to be more directly a part of the claims process.”

On the other hand, Nelson adds, “With the insured approach, you're more likely to have a tried and trusted plan design that provides stability to employers. Employers may be a little more 'hands off’ based on what's on their plate, and with those carrier policies there's typically going to be more incentive for the employee to return to work just because the benefit is often not to the extent of what might be seen on a self-funded policy.”

Financial considerations

If budget stability is a top priority, fully insured may be the best solution for your organization. You'll often pay a more predictable premium, and the insurer will take on the financial risk. This can help protect your organization from unexpected claim spikes and make forecasting easier.

On the other hand, self-funded STD — whether with ATP or ASO — can offer savings if claims are low and it can give your organization greater control over the payment process. However, it can also involve taking on higher risk and needing the internal staffing and resources to manage it.

Test your knowledge

To help bring the concepts to life, the webinar wrapped up with case studies that illustrate the process of assessing an organization's situation and evaluating which STD funding model may best fit their needs. For a deeper dive into the STD funding discussion and to try your hand at the knowledge-check questions, watch the full webinar here.

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