How would self-insured short-term disability benefits affect our compa

[Guest NFalci]

We have a self-insured Short Term Disability program. Currently benefit checks are cut by an outside vendor. We are considering bringing the payment procedures in-house within our payroll system. We are wondering what impact these in-house disability payments will have on 401(k). Would the disability benefits be eligible for pretax 401(k) deductions and corresponding company match contibutions?

If you have a similar STD arrangement, how do you handle 401(k) for those benefits?

[Guest Benefits Maven]

Depends upon your plan document, as does so many things! If this category of pay is included in your definition of compensation in your plan document then bringing the payments in house allows you to A) take 401(k) deductions from STD payments b) forces you to include these wages as compensation for limits, testing, and all that. To avoid this, you can amend your plan document to exclude disability pay and avoid the whole issue (which would be my recommendation).

[Guest NFalci]

Benefits Maven-

How does your company handle STD Compensation? Do you include it as 401(k)-able?

NFalci

[Guest Benefits Maven]

After much debate, we elected to exclude STD compensation and amended our documents to accommodate this. It saved a lot of headaches. Employees didn't want to have deductions from already reduced pay, for one thing. It's hard enough living on 65% of your usual income and saving becomes less of a priority in the short term, at least. It was also less expensive for the company - less compensation to be matched.

[KIP KRAUS]

I agree with Benefits Maven. The definition of compensation determines the inclusion in 401(k) income. When you go from an insured STD plan to a self-insured (or salary continuation) plan you need to know if the 401(k) plan determines the STD/salary continuation dollars as compensation eligible for 401(k) contributions and match.

I have administered a self-insured STD plan, which was very rich in benefits and we deducted 401(k) and all other normal deductions. We do not include insured STD (third pay) as eligible compensation in our 401(k) plan.

[Guest NFalci]

Thanks to both of you for your information.

[Guest Dave Burns]

What about disability payments made under an employer-funded insured arrangement? It appears from the definitions of compensation in the 415 regs. that both short and long-term disability payments are includible in the definition of compensation. Are payments made by an insurance company eligible for purposes of making 401(k) deferrals? Is anybody doing this?

[Guest Benefits Maven]

They are includable, but I don't know of anyone who does this. First your plan document would have to include them. Then you would have to find some way to handle third party payments deductions - I doubt the insurance carrier would want to do this. That would leave you with posting some sort of adjustment and contribution through your payroll system. Sounds pretty ugly to me and again, I doubt most people would be interested in having deductions taken from disability pay - maybe if the benefits are very generous.