Also known as the coordination level, the all-source maximum is used to ensure a plan member’s income while on disability bears a reasonable relationship to his or her pre-disability earnings. This provides an incentive to return to work by ensuring that disability income does not exceed the plan member’s pre-disability income.
A flat percentage can be used to calculate premiums but may not be accurate as it does not consider the differences in income and tax rates among plan members. A graded formula takes into account a plan member’s gross income, net income and the maximum a plan member can collect.
Plan members with a non-taxable plan and high-income plan members should consider a graded schedule. Plan members with higher earnings pay a greater portion of their income taxes, and with a flat schedule, the all-source maximum can end up being lower than their LTD benefit amount. This creates a gap between the insured benefit amount and the amount that is actually eligible to collect.
On the other hand, a graded schedule takes into account differences in income and tax rates, and resolves this issue by paying a lower percentage of disability benefits at higher income levels for non-taxable plans.
LTD benefit: $7,500 x 66.67% = $5,000
Net monthly earnings: $7,500 – deductions* = $5,246
All-Source Maximum: $5,246 x 85% = $4,459
This means that Jane is paying premium on $541 of LTD benefits that she will never be able to collect ($5,000 - $4,459 = $541).
*deductions include federal and provincial taxes, CPP and EI.
|Payout Type||Gross Annual Salary||Payout|