State Disability Insurance (SDI) Wage Cap Eliminated in 2024

The majority of individuals who work or reside in California must be aware of the SDI (State Disability Insurance) scheme. Noteworthy, from 2024, the country will be removing the SDI wage base, which will be a lot of changes for everyone pregnant and working in California. In this blog, we will discuss all the aspects of California SDI, why it matters, and what will change for you after 2024 when the SDI wage base is removed.

What is California SDI?

California came up with the State Disability Insurance (SDI) which pays temporary wages to workers absent from employment due to non-occupational sickness, physical injury or maternity. The SDI program is administered by the California Employment Development Department (EDD). The SDI program also entails the paid family leave (PFL) program which enables people to take time off work to care for a sick family member or to bond with a new child.

Every year, there is a limit referred to as the "SDI wage base" which determines the portion of a worker's salary that is taxable. The wage base for the year 2023 was $153,164 meaning that employees were only liable for paying SDI taxes on income earned up to this threshold.

Why is California SDI Important?

SDI plays a crucial role in providing a financial safety net for California’s workers. Here’s why it’s so important:

Financial Support During Hardship: SDI ensures that employees who are unable to work due to illness, injury, or family leave still receive some income to meet their financial needs.
Broader Coverage: Unlike other disability insurance, SDI covers a wide range of temporary conditions, including maternity leave and mental health issues, offering more comprehensive protection.
Legal Requirement: SDI is mandatory in California, meaning all eligible employees must participate unless their employer offers an approved alternative plan (Voluntary Plan Disability Insurance or VPDI).

Why Was the California SDI Wage Base Eliminated in 2024?

The decision to do away with the SDI wage base in 2024 is a necessary action geared towards achieving more equity and sustainability in the system. The following are some of the major causes of this change:

Higher Contribution: The removal of the wage base cap means that higher earners will contribute more towards the SDI fund, creating a healthier fund to address the increasing population and rising healthcare demands in California.
Improved Benefits: The state’s objective is to enhance the level and the period of SDI and PFL benefits. However, such improvements require increased revenue which will be realized by the abolition of the income ceiling on SDI contributions.
Economic Considerations: The wage base elimination ensures that SDI rates increase in tandem with SDI economic issues such as wage inflation and inflation of the general costs. This adjustment will make it possible for the program to also be able to cover the rising living expenses and health expenditures in California.

How Does the Elimination of the SDI Wage Base Impact Workers?

The removal of the maximum limit on wages subject to SDI taxes will automatically translate to “sacrifices” by the California workforce, particularly those on higher incomes, in terms of their contributions to the SDI program.

Higher Contributions for High Earners: With the introduction of the removal of the ceilings, there would be additional contributions from such individuals as all their wages will be taxed under the SDI regime.
Increased Funding for SDI Benefits: The other extra contributions which high-wage earners will put in place will enhance the SDI fund and will create room for improvement in coverage such as offering more leave days or increasing payment amounts.
Minimal Impact on Lower Earners: In the case of employees whose earnings fall below the previous wage base, their contributions will remain pretty much the same.

What Changes Should Employers Expect with the SDI Wage Base Removal?

Additionally, employers will have to make changes to their payroll operations due to the abolition of the SDI wage base. Here is what they must be prepared for:

Higher Payroll Deductions for High-Earning Employees: Any new payroll systems introduced will have to be adapted to ensure that SDI deductions are not capped at the prior wage base. This could mean upgrading some tax calculation software or even making changes to a manual payroll system.
Compliance with New Reporting Requirements: Employers will have to make sure that they are meeting the requirements of the California EDD, which has introduced new reporting rules. The abolition of the wage base could result in changes in how payroll taxes are filed.
Potential for Increased Employee Questions: The removal of the wage base means that employees are likely to have more concerns on matters concerning their SDI contributions and benefits. Employers will have to either provide this information or ensure that resources such as the California EDD for employees are available.

What Are the New SDI Tax Rates for 2024?

While the SDI tax rate stays the same at 1.1% for the year 2024, the notable change is the expanded applicability of this rate to all wages earned by California employees without a wage base limit. Utah has also moved to revamp its employment-based taxes and related programs, aimed at addressing worker compensation issues. For instance, in 2023 an employee with an annual salary of $200,000 would be required to pay SDI taxes only on the first $153,164 of her earnings. Per the new regulation, the same employee will be required to contribute 1.1% of their entire wage of $200,000 which increases the overall contribution.

What Are the Key Facts and Figures Behind the 2024 SDI Wage Base Changes?

Here are the key numbers you should know regarding the 2024 changes to SDI:

• 2023 SDI Wage Base: $153,164
• 2024 SDI Wage Base: Eliminated (no cap on taxable wages)
• 2024 SDI Tax Rate: 1.1% of all wages (no income ceiling)
• Maximum SDI Contribution (2023): $1,684.80 (1.1% of $153,164)
• Estimated Maximum SDI Contribution (2024): Variable, depending on total income (e.g., $2,200 for someone earning $200,000)

By eliminating the wage base, the California SDI program ensures more funds are available to support those in need while making the system more equitable for high earners.

What Alternatives Do Employers Have to Traditional SDI?

Employers in California have the option to offer alternative disability insurance plans through the Voluntary Plan Disability Insurance (VPDI). These plans must provide at least the same level of benefits as the state-run SDI program, and they can offer certain advantages:

Customization: Employers can tailor their VPDI plans to better meet the needs of their workforce, offering enhanced benefits or lower employee contribution rates.
Cost Savings: In some cases, employers may find that offering a VPDI is more cost-effective than participating in the state’s SDI program, especially if they have a younger, healthier workforce with lower usage rates.
Employee Satisfaction: Providing a VPDI can demonstrate a company’s commitment to employee well-being, potentially boosting morale and retention.

What Can Workers and Employers Do to Prepare for the SDI Wage Base Elimination?

Both workers and employers should take proactive steps to prepare for the changes coming in 2024:

For Workers:

Review Your Pay Stub: Understand how much of your income is currently going toward SDI and calculate how the wage base elimination may impact your contributions.
Plan for Higher Deductions: If you are a high earner, expect to see an increase in your SDI contributions in 2024. Adjust your budget accordingly to accommodate the higher deductions.
Understand Your Benefits: With more funds going into the SDI program, there may be improvements in the benefits offered. Stay informed about any updates or changes to the program.

For Employers:

Update Payroll Systems: Ensure that your payroll systems are equipped to handle the elimination of the wage base and can accurately calculate SDI contributions for all employees, regardless of income level.
Communicate with Employees: Provide clear communication to employees about how the SDI wage base elimination will impact their paychecks and benefits.
Consider Alternative Plans: Explore the possibility of offering a VPDI to your employees as an alternative to the state-run SDI program.

Conclusion

With 2024 around the corner, the lifting of the California SDI wage limit is bound to cause waves in the disability insurance program within the state. There is no doubt that high-income earners will pay more in contributions, but there is hope that the SDI fund will be boosted and the benefits extended to all the workers in California.
All parties that are involved should brace for the pending changes bearing in mind that their payroll systems and personal budgets must be restructured to accommodate the new tax regime. As we get into the year 2024, it will be imperative that one is well-oriented with the current changes in the system in order to mitigate the effects of abolishing the SDI wage base.
Global FPO understands how challenging it can be for employers to adapt to state laws and to correctly modify their payroll systems. Call us now for help with your payroll, taxes, or any other services related to finance!

Frequently Asked Questions (FAQs)

Will employees be able to opt out of SDI after the wage base elimination?
No, SDI participation is mandatory for all eligible employees unless their employer offers a state-approved Voluntary Plan Disability Insurance (VPDI).

How does the elimination of the SDI wage base affect independent contractors?
Independent contractors are not required to pay SDI taxes unless they voluntarily participate in the program.

Will there be any changes to the application process for SDI benefits in 2024?
There have been no announced changes to the application process for SDI benefits, but employees should monitor for any updates.

What happens if an employer fails to adjust their payroll system for the SDI wage base elimination?
Employers may face penalties for non-compliance, including fines and required back payments for any underpaid SDI taxes.

How often will the SDI tax rate be reviewed and potentially adjusted after the wage base elimination?
The SDI tax rate is reviewed annually and could be adjusted based on the financial health of the SDI fund and future economic conditions.