State Tax Problems

Why CA Employers Should Consider A Voluntary Plan In 2023

Why CA Employers Should Consider A Voluntary Plan In 2023

Weekly benefit amounts for California’s State Disability Insurance (SDI) program range between 60% and 70% of an employee's wages. The enactment of SB 951 in September 2022 extended this percentage of average weekly wages (AWW) through the end of 2024. However, the SDI benefits will increase again in 2025 to between 63% and 90% of AWW for lower-income workers.

As an alternative to this increase, California allows employers to offer a voluntary disability plan, provided it falls within certain requirements. Revenue from the increased SDI rate will provide increased benefits for low-income workers, but not for higher earners. These benefit enhancements are funded by the elimination of the taxable wage limit on individual wages subject to annual SDI withholding wages effective January 1, 2024.

How a voluntary plan can benefit California employers

California allows employers to opt out of participating in the state disability insurance program by offering their own voluntary plan that is funded solely through employee withholding. To offer a voluntary plan, California employers must get approval from the California Employment Development Department (EDD) after ensuring that their plan meets the voluntary plan requirements. According to the EDD website, a voluntary plan must:

  • Offer the same benefits to employees as the SDI program
  • Provide at least one benefit that is better than the SDI program
  • Not cost employees more than the SDI
  • Be updated to match any SDI benefit increase based on new legislation or approved regulations

It’s important to note that an employer with only one location in California cannot offer this option only to their highly compensated employees. This aspect of a voluntary disability plan is likely to be beneficial for businesses that have few disability claims and either many highly compensated employees or many employees. The benefits paid through a voluntary plan are considered non-taxable unemployment benefits and can either be self-administered or through a third-party administrator.

Offering a voluntary plan will eliminate the costs that employers would indirectly incur if staying within the state disability insurance program. For example, the reduction in employee take-home pay would require employers to increase wages to stay competitive in the labor market and avoid losing employees.

Employers considering a voluntary plan should prepare now

Even though the SDI tax increase doesn’t go into effect until 2024, employers should start preparing now so they can:

  • Review voluntary plan options: Many insurance companies specialize in voluntary plans. Employers may want to check with their current insurance broker to see if they offer voluntary plans.
  • Evaluate potential third-party plan administrators: For employers that choose not to self-administer their voluntary plan, it would be prudent to start shortlisting companies now to allow enough time to ensure the best choice.
  • Educate employees about the program: One of the stipulations of a voluntary plan is that over 51% of employees elect to participate in it. Beginning employee education efforts now will increase the likelihood of meeting the required employee participation percentage during the election procedure.

For more information about voluntary plans and their legal requirements, you can refer to the EDD’s Voluntary Plan Procedures manual and the Voluntary Plan FAQs page on the EDD website.

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Cassidy Jakovickas

Cassidy Jakovickas

CEO

Cassidy is an active member of Intuit’s ProConnect community and CalCPA, a former member of Intuit’s Accountant Council, and a 2021 honoree of The CPA Practice Advisor's 40 under 40 award. Since 2011, Cassidy has led his accounting firm, MBS Accountancy, as it provides financial clarity for clients through insightful accounting and prudent tax planning.

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