The Owner Who Cannot Afford to Stop Working
Devon, 44, owns a 12-person landscaping company organized as an S corporation. He takes a $120,000 W-2 salary and reports about $95,000 of pass-through income on his K-1. Personal fixed expenses run $8,900 per month, including a $2,450 mortgage; the business carries $310,000 of equipment debt and two facility leases that continue whether or not he can work. The company's only disability benefit is an employer-paid group LTD policy paying 60% of base salary after 90 days, with a 24-month payment limit and a standard 'other income' offset that includes Social Security. Devon has no individual disability coverage, no retirement plan, and $40,000 in savings. He is also choosing the company's medical plan for his family: an HSA-qualified HDHP at $1,180/month with a $3,500/$7,000 deductible, a $9,200 family out-of-pocket maximum, and a $2,000 employer HSA contribution; or a copay PPO at $1,540/month with $30 office visits and a $2,000/$4,000 deductible. His wife has stable rheumatoid arthritis managed on a biologic costing about $2,200 per month, with a manufacturer copay card covering $1,500.
1. Calculate the realistic maximum individual disability benefit Devon can buy and explain how the group LTD changes the answer.
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Step 1 - Countable income. Carriers generally define earned income from W-2 wages plus, where documented on two years of returns, K-1 income attributable to his personal services. Using $120,000 + $95,000 = $215,000 (some carriers will discount or exclude K-1 distributions, so confirm before quoting).
Step 2 - Issue limit. Most carriers cap at 60–70% of earned income: 60% × $215,000 = $129,000/year, about $10,700/month. That is the ceiling, not the answer.
Step 3 - Offset the group plan. Group LTD pays 60% × $120,000 = $6,000/month. Because the premium is 100% employer-paid, benefits are taxable under IRC §105, so at roughly a 30% marginal rate he nets about $4,200 - less than half of his $8,900 of fixed expenses. And the 24-month limit means the gap opens in year three, when the mortgage, leases, and equipment debt are still there.
Most individual carriers count the group benefit as other income and will issue only the difference: roughly $2,500–4,000/month of individual coverage on top.
Step 4 - Fix the structure, not just the number. Options: (a) reduce or drop the group LTD and let Devon buy individual coverage personally with after-tax dollars, making benefits tax-free under §104(a)(3) - usually the better trade for an owner; (b) if group coverage stays, use a group-offset rider that pays the full individual benefit only when the group benefit ends, restoring protection after 24 months; (c) add a future increase option now so coverage grows with income without new underwriting; (d) fund the business's continuing obligations separately with a business overhead expense policy, which does not count against his personal issue limit.
2. Design the individual policy: elimination period, benefit period, definition of disability, riders, and the business overhead expense piece.
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Elimination period. He has three months of sick leave plus $40,000 of savings, and the group pays after 90 days. A 90-day elimination period aligns with the group plan; a 180-day period cuts premium meaningfully and is defensible given his reserves. Do not choose an EP longer than his liquid reserves can carry.
Benefit period. To age 65 (or 67) - his need is income until retirement, and a 5-year benefit period would leave him exposed in his fifties.
Definition. Own-occupation matters enormously here. If he cannot do the physical site work but could still supervise, an 'any-occupation' or modified own-occupation clause (typically after 24 months) could deny the claim. Buy true own-occ for the full benefit period, or at minimum for 5 years, and read the residual clause.
Riders. Residual/partial disability to pay proportionally on a partial return to work; a 3% COLA because a claim could run 20 years; future increase option; non-cancellable and guaranteed renewable.
Business overhead expense. Sized to the fixed obligations that continue without him - debt service on $310,000 of equipment plus the two leases, and possibly one key employee's salary - excluding his own compensation and cost of goods sold. Most contracts have a 12- or 24-month benefit period and a carrier maximum; reimbursement is typically monthly against actual expenses, so over-insuring wastes premium. The BOE policy does not reduce his personal benefit limit.
3. Compare the HDHP/HSA and the copay PPO for his family, showing the method he should use to decide.
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Start with the premium gap. $1,540 − $1,180 = $360/month, or $4,320/year, plus a $2,000 employer HSA seed - a $6,320 head start for the HDHP before any claim.
Then model three spending scenarios (a healthy year, an expected year, a worst case up to each plan's out-of-pocket maximum) and compare total cost: premium + out-of-pocket − employer HSA contribution − the tax value of HSA dollars. At a 30% combined rate, $2,000 of employer money plus his own contributions saves roughly $600+ per year in tax, and unused HSA balances roll over, invest, and can pay Medicare premiums later. There is no 'use it or lose it'.
Then stress the specific claim. With a $2,200/month biologic ($26,400/year), the family will likely reach the deductible and possibly the out-of-pocket maximum on either plan, which compresses the difference between them. Check two things: (a) whether the plan uses a copay accumulator or maximizer program that stops the manufacturer's $1,500/month card from counting toward the deductible - if so, his real exposure under the HDHP rises sharply; (b) whether the biologic sits on a specialty tier with coinsurance rather than a flat copay under the PPO.
Eligibility traps. Confirm no disqualifying coverage: a general-purpose health FSA (his or his spouse's), Medicare enrollment, or TRICARE ends HSA eligibility. A limited-purpose FSA paired with the HDHP is fine.
Recommendation framework. If the plan permits the copay card to count toward cost-sharing, the HDHP usually wins on total cost plus the long-run HSA balance. If an accumulator program blocks it, price the PPO's specialty-tier exposure carefully before recommending the HDHP on premium savings alone.