California's State Disability Insurance (SDI) program provides partial wage replacement for California workers under two short-term benefit programs available to eligible workers, disability insurance, and paid family leave. Generally speaking, weekly benefit amounts range between 60% to 70% of an employee's wages. This SDI tax rate is scheduled to increase to 90% for lower-income workers beginning in 2025.
The SDI tax, which is currently set at 0.9% for 2023 will apply to an employee's total wages rather than being capped at a specified amount, starting January 1st, 2024. For 2023, the maximum wage base that the tax could be applied to was set at $153,164. Eliminating the wage base amounts to a 1% tax increase on wages above the current $153,164 base.
Revenues raised with the increased tax base will fund increased benefits for lower-income workers, but will not provide additional benefits to higher-wage earners. But there are ways that employers may be able to minimize this tax increase on their employees while potentially offering greater benefits to their employees.
Instead of participating in the state's disability insurance program, California allows employers to offer a voluntary plan, but any such plan has to be pre-approved by the California Employment Development Department.
The plan can still be funded by employee contributions, which have to be placed in a separate trust fund, but certain requirements need to be met, including:
A California employer with only one location cannot offer this option only to their highly compensated employees. This option could be beneficial for businesses that have lots of highly compensated employees and/or large numbers of employees and very few disability claims.
Although the SDI tax is funded solely through employee withholding, and will not result in an employer's costs mean directly increased, offering a voluntary plan will enable employees to keep more of their wages and may indirectly lower an employer's costs.
This is because they would not have to offer increased wages to counter the reduced take-home pay, and could stay competitive in the labor market. The voluntary plan can be self-administered, but most employers contract with a third-party administrator to administer the plan. Benefits paid through a voluntary plan are treated as non-taxable unemployment insurance benefits.
While the increased SDI rate doesn't go into effect until 2024, employers that are considering offering a voluntary plan should start the process now so they have time to:
There are insurance companies that specialize in voluntary plans, but employers may want to check with their current insurance brokers to see if they offer this type of plan. It will also take the EDD approximately 30 days to review any application.