Disability Coverage in Group Benefits – STD, LTD, and Absence Management Best Practices

Executive Summary

Disability benefits are one of the most financially significant and complex components of a Canadian group insurance plan—and also one of the most emotionally charged.

Done right, they protect both the employer and employee during periods of extended illness or injury. Done poorly, they result in:

• High premiums

• Long absences

• Frustrated employees

• Productivity loss

• Legal or HR challenges

This article dives into everything Canadian plan sponsors need to know to design, benchmark, and manage Short-Term Disability (STD) and Long-Term Disability (LTD) programs, including:

• STD vs LTD vs government programs

• Elimination periods and benefit formulas

• Taxable vs non-taxable plan design

• Common pitfalls and premium drivers

• Absence management and return-to-work strategies

• Best practices in insurer selection, claims governance, and plan integration

1. What Is Disability Coverage—and Why Does It Matter?

Disability coverage replaces a portion of income when an employee is unable to work due to illness or injury.

Why it’s critical:

• Financial lifeline for employees

• Major driver of benefit plan cost (especially LTD)

• Risk exposure for employers (reputational, compliance, financial)

• Impacts engagement, culture, and workplace productivity

2. Short-Term Disability (STD) in Canada

STD typically covers:

• Illnesses or injuries lasting 1 to 26 weeks

• Between 66.7% and 100% of salary, depending on design

• Benefits often taxable (if premiums are employer-paid)

Common models:

• Self-insured (employer pays benefits, often administered by TPA or internal HR)

• Insured (premium paid to insurer, who adjudicates claims)

Typical design:

• Elimination period: 0 to 7 days (waiting period)

• Benefit duration: 17–26 weeks

• Adjudication: Employer, insurer, or third-party

Employers with more than 100 employees often self-insure STD and insure LTD.

3. Long-Term Disability (LTD) in Canada

LTD covers:

• Illnesses or injuries lasting beyond STD period

• Income replacement up to age 65

• Usually based on 66.7% of salary, non-taxable if employee-paid

Key features:

• Elimination period: 90 or 120 days

• Benefit max: Often capped at $3,000–$10,000/month

• Definition of disability:

  • Own occupation: for first 2 years

  • Any occupation: thereafter

LTD claims can cost hundreds of thousands of dollars per claimant—insurer selection and governance matter.

4. EI Sickness Benefits vs Employer-Paid STD

Employment Insurance (EI) offers:

• 55% of weekly earnings

• Up to 15 weeks

• Capped at ~$668/week (2025)

Employers can:

• Supplement EI with a top-up program

• Replace EI with their own STD plan

• Use EI for casual or part-time workers while covering full-time staff internally

5. STD/LTD Plan Design: Key Levers and Terminology

6. Taxable vs Non-Taxable Disability Benefits

Best practice: Make LTD 100% employee-paid to ensure non-taxable benefits.

STD often remains taxable, especially if employer-funded or top-up to EI.

7. Cost Drivers and Premium Benchmarks

STD costs:

• $0.30–$0.80 per $10 of weekly benefit

• Heavily impacted by industry, absence rates, and adjudication approach

LTD costs:

• 1.0%–2.5% of monthly earnings

• Driven by:

  • Industry risk (healthcare, manufacturing = higher)

  • Mental health claims (growing)

  • Average age of workforce

  • Definition of disability

Employers should review:

• Claims experience (frequency, severity)

• Carrier pooling thresholds

• Trend assumptions

8. Absence Management and RTW Programs

Effective disability strategy includes:

• Early intervention protocols

• Regular check-ins during STD

• Modified duties or graduated return-to-work (RTW)

• Case management support (insurer or internal)

• Mental health accommodations

• Job protection planning

The goal isn’t just paying claims—it’s helping people recover and return.

9. Integration with Workers’ Comp, EI, and Government Benefits

Complex claims often involve multiple payers:

Your plan design should outline:

• Integration rules

• Offset provisions

• Appeals processes

10. Emerging Trends in Disability and Mental Health

• Mental health is the #1 LTD claim driver in many industries

• Insurers now offer:

  • Early access to mental health professionals

  • Digital CBT and teletherapy

  • Case triage based on risk factors

• Shorter “own occupation” periods used to control cost

• Employers embedding resilience, manager training, and trauma-informed policies

11. Governance, Audits, and Insurer Performance Reviews

Key practices for large employers:

• Annual LTD claim audits

• STD adjudicator performance reviews

• Appeal and escalation governance

• Biannual insurer performance meetings

• Reporting by:

  • Cause of claim

  • Duration

  • Return-to-work success rate

  • Legal or dispute flags

Don’t just renew—review.

Final Thoughts

Disability benefits are mission-critical—for both human and financial reasons.

The best employers:

• Understand the difference between STD, LTD, and public programs

• Benchmark regularly

• Design for both compassion and cost

• Invest in early intervention and RTW

• Manage carrier relationships like strategic partners

If you’re unsure whether your disability plan is optimized—or if you suspect cost or risk is increasing—it’s time for a review.

We can help.