Since 2020, eight states plus the District of Columbia have launched new, mandatory statutory disability and paid family medical leave (PFML) programs, with Minnesota and Maryland scheduled to follow in 2026 and 2027. Meanwhile, California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island continue to operate long-standing programs. This rapid expansion, coupled with the rise of remote work, creates new compliance challenges for employers.
Coverage Options: State-Run Programs and Private Plans
Statutory disability and PFML programs require employers to provide benefits for eligible employees such as income replacement in the event employees are unable to work for qualifying reasons. Qualifying reasons typically include employees’ own serious health conditions, providing care for family members, and bonding with new children. In most states, employers have two options for providing mandatory PFML coverage, state-run programs and private plans.
State-run programs
With state-run programs, employers pay for coverage by remitting payroll contributions to the states. The contribution rates are set by the states and are typically reviewed annually. Each state sets one rate based on the pooled experience of all participating employers. The contributions for some PFML programs are shared by employers and employees, while others are funded entirely by employees.
Private plans
Employers pay for coverage by remitting fully insured premiums (or administrative fees if coverage is self-insured) to an insurer or third-party administrator (TPA) and are exempt from state payroll contributions. The rates are set by the insurer or TPA and, unlike the state-run programs, are based on each employer’s unique risk profile, with rates varying based on employer-specific claims experience and/or industry and demographic factors.
Employers may deduct contributions from employees to offset private plan costs if employee contributions are permitted under the state-run program. Many states stipulate that private plans cannot cost employees more than the state-run programs, so private plan costs that exceed state-run program costs must be borne by employers.
Exceptions:
- District of Columbia and Rhode Island: state-run programs only (private plans are not permitted)
- Hawaii: private plans only (there is no state-run program)
Why Employers Explore Private Plans
Private plans have some advantages that make them worth considering.
Potential cost savings
The rates for private plans are set by insurers, allowing for potential cost savings compared to the state-run programs. Industry and demographic factors have a substantial impact on pricing, and employers in white collar industries such as technology are viewed favorably from a risk perspective. As a result, employers in these industries often receive financially competitive rates compared to the state contribution rates.
Integration with other disability and leave programs
Having one vendor administer a private plan in conjunction with other programs like short-term disability (STD), FMLA, and other employer leaves, which often run concurrently, can provide a more integrated, simplified experience. HR, benefits, and payroll teams can expect less back-and-forth when partnering with one vendor versus working with multiple entities (states for PFML, vendors for STD/leave).
Improved service and administration
Disability claim adjudication and leave of absence administration is a core competency of insurers and TPAs. Vendors leverage their experience, investments in technology, and efficient processes to deliver superior service. Private plans can provide employers with faster claim decisions compared to state-run programs and access to a dedicated account manager. Employers with private plans have greater access to reporting and analytics through vendor portals, whereas state-run programs provide limited insight.
Improved employee experience
Having a coordinated intake process for STD, FMLA, employer leaves, and statutory disability and PFML programs means employees can avoid separate intake processes with multiple entities. The vendor administering a private plan will conduct a coordinated intake process for all applicable programs they manage, often utilizing a single claim and leave system. The result is less paperwork for employees, more consistent communication, and one point of contact.
Which Option is Right for You?
Although private plans offer many advantages, employers should evaluate private plans on a case-by-case basis, being mindful of the following key considerations.
Eligible employee population size
If employers do not have a minimum number of eligible employees (e.g. five to 10), vendors may not offer private plans. For California private plans in particular, vendors have higher minimum employee thresholds (e.g. 500) due to the more stringent requirements and increased implementation effort required from employers and vendors. If vendor minimum size thresholds are met, employers with smaller eligible employee populations should weigh the benefits of private plans against the implementation effort required and the volume of claims likely to occur.
Funding options
Most states allow vendors to provide both fully insured and self-insured private plans. California and Washington are exceptions in that private plans must be self-insured. Fully insured private plans (or the state-run programs for California and Washington) are recommended for smaller eligible employee populations. When the number of eligible employees for a given statutory PFML program exceeds certain thresholds (250 employees as a general rule), employers should evaluate self-insured private plans.
Administrative requirements
Each state has unique requirements for employers seeking to establish private plans. Examples include application fees, employee approval, solvency requirements, segregated funds, and periodic filings.
Application fees: These fees represent a relatively small expense payable to the states upon review of an employer’s initial request for a private plan or periodically to recertify an existing private plan.
Employee approval: If employee approval is required, employers must facilitate a vote, and a majority of eligible employees must vote in favor of a private plan. Employers must abide by any employee communication requirements in advance of the vote, and ensure appropriate recordkeeping is in place to document employee votes.
Solvency requirements: Proof of solvency, typically in the form of a security deposit or surety bond, may be required by states to ensure employers are able to meet the financial obligations of private plans.
Segregated funds: For California private plans, employers must set up a separate bank account for employee contributions, and the account must only be charged with benefits and allowable administrative costs incurred from plan operations. All income to the plan, benefit payments, and allowable costs must be shown separate from all other operations of the employer.
Periodic filings: Many states require annual reporting or recertification of private plans to verify ongoing compliance. With fully insured private plans, vendors may take responsibility for filings on behalf of the employer. With self-insured plans, more responsibility tends to fall on employers, including adjustments to security deposits or surety bonds, or annual claims reporting.
Key Takeaways
Private plans may lower costs and provide simplified administration for employers. Employees benefit from a coordinated intake process with faster claim decisions and payment. Population size is often a determining factor of whether private plans are a good fit. Employers must weigh the advantages of private plans against added responsibilities on a state-by-state basis.
Have Questions about your Life, Disability, and Leave Benefits Strategy?
To support companies and their employees, Sequoia’s Leave Advisory team provides strategic insight, compliance expertise, customized benchmarking, underwriting, employee communications and vendor management services. To learn more, connect with a Sequoia advisor.
