Changes to California (CA) State Disability Insurance (SDI) Program: What Employers Should Know

Background

CA currently has a statutory SDI program that is funded by payroll taxes. The statutory disability program has been in effect since 1946 with changes along the way, one which included the addition of a component establishing paid family leave (PFL).

In 2002, CA PFL was signed into law creating two types of SDI benefits, disability insurance and paid family leave. This created the nation’s first ever PFL program and it provides up to eight weeks of benefits to covered workers who need time off to care for a seriously ill family member, to bond with a new child, or to participate in a qualifying military event.

CA SDI and PFL is financed by workers and paid from the SDI fund. The SDI financing structure currently includes a component called the taxable wage ceiling formula. In short, taxable wages are limited each year and are tied to the maximum weekly benefit amounts increasing. The current wage ceiling is $153,164 which means workers aren’t taxed on income above this amount.

What Changes Are Coming to the CA SDI Program?

On September 30, 2022, Governor Newsom signed Senate Bill (SB) 951 into law which makes changes to the CA SDI program. The Governor’s office issued a statement that SB 951 “will boost leave benefits for lower-and-middle-income employees to cover more of their regular income while they take much needed time off to care for loved ones.”

Starting on January 1, 2025, wage replacement rates will increase to 90% for low wage workers and to 70% for everyone else.

The 90% wage replacement rate (not to exceed the maximum workers’ compensation temporary disability indemnity weekly benefit amount) will apply to workers making 70% or less of the state average weekly wage (approx. $60K annually in 2023), an increase from 70% in 2023.

All other workers will receive 70% wage replacement up to a cap (not to exceed the maximum workers’ compensation temporary disability indemnity weekly benefit amount, or 63% of the state average weekly wage) an increase from 60% in 2023.

How is the CA SDI Program Paying for This Increase in Benefits?

The taxable wage ceiling will be lifted as of January 1, 2024. Beginning in 2024, all CA wages will be subject to the CA SDI tax of .9%.

Note: The sponsor of the SB 951 projects that 92% of workers will see no change to their annual contribution while those making over the current taxable wage ceiling are comprised of the 8% of workers who will experience increased taxes.

As an example, a person making $200,000 annually currently would pay the maximum annual contribution of $1,378. In 2024, there will no longer be a salary cap, resulting in an increase of $422 ((200,000 x .009) – 1378)) for a worker making $200,000 annually.

Does the Increased CA SDI Benefit Affect Employer-Sponsored Short-Term Disability (STD) Policies for CA Workers?

There is a possibility that the CA SDI changes will affect group STD policies starting January 1, 2025. This is because some group STD policies integrate with state disability benefits which could affect the benefit amount the group policy pays to CA workers. Contact your benefits broker for more information.

Note: STD insurers may not have a response this early in the process as they work to understand the cost and benefit implications of the increased CA SDI benefits starting in 2025.

What Do Employers Need to Do?

Employers should work with payroll to ensure all CA wages are subject to the CA SDI tax with no income or contribution limit, starting January 1, 2024.

Employers sponsoring a group STD policy should contact their broker to understand if their group policy needs to be adjusted to reflect the CA SDI benefit changes starting January 1, 2025.

There is no requirement to provide notice to affected employees.

Summary

Higher wage earners should expect to pay increased CA SDI taxes starting January 1, 2024 due to the removal of the taxable wage ceiling which will fund the increased benefits in 2025. Additionally, workers qualifying for CA SDI benefits on or after January 1, 2025 will be eligible for increased benefits, especially those earning 70% or less of the state average weekly wage.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information. This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.