California Voluntary Plan Requirements: Approval, Deposit, and Costs

California employers can opt out of the state-run Disability Insurance and Paid Family Leave programs by setting up a Voluntary Plan, a privately administered alternative to SDI and PFL that must deliver benefits at least as generous as the state’s. Under the Unemployment Insurance Code, an approved plan has to match every element of state coverage and exceed it in at least one measurable way, while charging employees no more than the state’s 1.3 percent contribution rate and keeping pace with the 2026 maximum weekly benefit of $1,765.1Employment Development Department. Contribution Rates and Benefit Amounts In exchange for that flexibility, the employer takes on security deposits, trust fund accounting, annual reporting to the Employment Development Department, and the obligation to raise benefits whenever the Legislature raises them.

What the Plan Must Cover

The EDD will only approve a Voluntary Plan that gives employees rights greater than what the state program provides.2California Legislative Information. California Code Unemployment Insurance Code 3254 “Greater” means the plan first matches the state program across the board and then beats it somewhere concrete.3Employment Development Department. Employer Voluntary Plans Employers usually satisfy this with a higher weekly benefit, a shorter waiting period, or a broader definition of covered family members for PFL claims.

2026 State Benchmarks

To match state coverage, the plan has to hit these numbers:

Coverage has to encompass every situation the state program recognizes: pregnancy-related disabilities, non-occupational illness or injury, bonding with a new child, and caring for a seriously ill family member. And when the state raises the maximum weekly benefit, extends PFL duration, or changes the contribution rate, the Voluntary Plan adjusts automatically to keep pace.3Employment Development Department. Employer Voluntary Plans

Getting Employee Consent

An employer cannot switch employees from state coverage on its own. A majority of the employees to whom the plan would be available must consent before the employer can even apply.7California Legislative Information. California Code Unemployment Insurance Code 3257 Consent can be gathered through written or electronic statements or a secret ballot. Before any vote, employees have to receive a written explanation of the plan’s terms and how they compare to state coverage.

If 85 percent or more of eligible employees consent, the employer (or 75 percent of the consenting employees) can elect to apply the plan to everyone eligible, except any individual who affirmatively rejects it. Any employee who prefers to stay under state SDI keeps that right. The opt-out takes effect at the start of the next calendar quarter after the employee gives reasonable written notice, and the employer continues withholding SDI contributions from that worker’s wages.7California Legislative Information. California Code Unemployment Insurance Code 3257

Security Deposit and Trust Fund Obligations

A self-insured employer (one not using an admitted disability insurer) must post a security deposit before the EDD will approve the plan. Acceptable forms include a surety bond from an admitted insurer, cash, an irrevocable letter of credit, or U.S. or California bearer bonds.8California Legislative Information. California Code Unemployment Insurance Code 3258 The minimum is $1,000. The formula multiplies the current SDI contribution rate by one-half of the estimated taxable wages to be paid to covered employees.9Employment Development Department. Employers Guide to Voluntary Plan Procedures DE 2040 At the 2026 rate of 1.3 percent with no wage ceiling, an employer with $10 million in covered payroll would need at least $65,000 on deposit.

The deposit is checked yearly. By April 15 each year, the employer files a Security Review Worksheet (Form DE 2544SRW) so the EDD can verify the amount is still adequate. If the gap between the existing deposit and the required amount is 5 percent or more, the employer adjusts it. Failing to maintain sufficient security is grounds for the EDD to terminate the plan.9Employment Development Department. Employers Guide to Voluntary Plan Procedures DE 2040

Trust Fund Accounting

All employee contributions collected under a Voluntary Plan are legally trust funds. They are not part of the employer’s assets. They must be held in a separate, identifiable account at a financial institution or transmitted directly to the admitted disability insurer administering the plan. Payroll deductions for disability coverage cannot be commingled with operating funds. If the employer later withdraws from the plan and holds excess contributions that haven’t been distributed under EDD rules, that money goes to the state Disability Fund.10Justia. California Code Unemployment Insurance Code 3260.5

Contribution Ceiling

Employers can absorb part or all of the plan’s cost, but they cannot deduct more from employee wages than the state program would.11California Legislative Information. California Code Unemployment Insurance Code 3260 For 2026 that ceiling is 1.3 percent of all wages. Employers who cover part of the contribution effectively give workers a smaller payroll deduction while still meeting or beating state benefits, and that subsidy is one of the accepted ways to satisfy the “greater than” requirement.

How to Apply

The application is Form DE 2520BV (Application for Approval of Self-Insured Voluntary Plan of Disability Benefits), submitted with the proposed plan text and the security deposit.12Employment Development Department. Become a Voluntary Plan Employer File before the requested effective date, and give yourself room: the EDD needs time to review plan documents, verify the deposit, and confirm the employee consent records.9Employment Development Department. Employers Guide to Voluntary Plan Procedures DE 2040 The agency will either certify the plan or ask for modifications.

Ongoing Costs and Reporting

Voluntary Plan employers don’t pay into the state Disability Fund, but they do pay an annual assessment to the EDD for administrative oversight. For 2026 the assessment is 14 percent of the state plan’s 1.3 percent contribution rate, or 0.182 percent of taxable wages.13Employment Development Department. Voluntary Plan General Release Letter 2026 That’s on top of benefits paid and any administration fees.

Each year by February 15, self-insured employers file the Annual Report of Voluntary Plan Transactions (Form DE 2568V) covering the prior calendar year. The report itemizes the plan’s fund balance, employee and employer contributions received, interest income, benefits paid for both disability and PFL, administration fees, and the assessment paid to the EDD.14Employment Development Department. Annual Report of Self-Insured Voluntary Plan Transactions DE 2568V It also discloses the bank name and account number where trust funds are held and any outstanding employer loans to the plan.

Late filing has teeth. Filing more than 60 days past the due date triggers a 15 percent penalty on late contributions and withholdings. Failure to file wage reports after a written demand runs $20 per wage item. And if the EDD finds a deficient report resulted from negligence or intentional disregard, the penalty is 15 percent of the assessed contributions, with no good-cause exception.15Employment Development Department. Penalty Reference Chart DE 231EP

Federal Tax Treatment

How benefits are taxed federally depends on whether the payment is for disability or family leave, and on who funded the contribution:

  • Disability benefits funded by employee contributions are excluded from gross income under Internal Revenue Code Section 104(a)(3), and they are not wages for FICA or FUTA.16Internal Revenue Service. Revenue Ruling 2025-4
  • Disability benefits funded by employer contributions are included in gross income under Section 105 and are wages for federal employment tax purposes.16Internal Revenue Service. Revenue Ruling 2025-4
  • Family leave benefits are included in federal gross income no matter who funded the contribution. They are not wages for FICA or FUTA.16Internal Revenue Service. Revenue Ruling 2025-4

Mandatory employee contributions are treated like state income tax. Employees who itemize can deduct them under Section 164(a)(3), subject to the $10,000 SALT cap. If an employer voluntarily picks up the employee’s share of contributions, the IRS treats that amount as additional compensation included in the employee’s gross income and wages.16Internal Revenue Service. Revenue Ruling 2025-4

Termination and Business Sales

Approval isn’t permanent. The EDD can terminate a plan if it finds that accrued benefits may not be paid, that the deposit is insufficient, or for other good cause.17Justia. California Code Unemployment Insurance Code 3262 The EDD must notify the employer, the employee group, and any insurer of its intent to terminate, including the effective date and reason. The employer has 10 days from that notice to appeal to the Unemployment Insurance Appeals Board.

When termination takes effect, all money in the plan (employee contributions, employer contributions, amounts owed to the plan, and accrued interest) goes to the state Disability Fund. The EDD can assess the employer for any benefits it pays from the Disability Fund after termination. Employees revert immediately to state SDI as if the exemption had never existed, so there is no coverage gap.18Justia. California Code Unemployment Insurance Code 3263

Successor Employers

An acquisition doesn’t transfer a Voluntary Plan automatically. The buyer files its own application, Form DE 2041, to continue the plan and takes on all obligations and liabilities of the predecessor.19Employment Development Department. Application for Approval of Voluntary Plan for Successor DE 2041 The form asks for the type of succession (purchase, merger, corporate reorganization), the number of employees to be covered, estimated taxable wages, and new security deposit arrangements. If the successor doesn’t apply or isn’t approved, the plan terminates and employees go back to state SDI.

Employee Appeal Rights

Voluntary Plan employees have the same appeal rights as employees under the state program. If the employer or its third-party administrator denies a disability or PFL claim, the employee can appeal to the California Unemployment Insurance Appeals Board.20California Legislative Information. California Code Unemployment Insurance Code 3264 The appeal has to be filed within 30 days of the date on the denial notice, either electronically or in writing.21Employment Development Department. State Disability Insurance Appeals If the Appeals Board also denies the claim, the employee’s remaining remedy is a petition for writ of mandate in state court.