Short answer: Employer-paid coverage gets everyone covered, usually with simpler underwriting, but the benefits are taxable. Employee-paid coverage with after-tax dollars costs the employer nothing and makes benefits tax-free, but fewer people enroll, and the employer must stay hands-off to keep the plan outside ERISA.
Tax. Employer-paid premium is excluded from the employee’s income (IRC 106(a)), so the benefit is taxable later (105(a)). Premium the employee pays after tax makes the benefit tax-free (104(a)(3)). Running a voluntary premium pre-tax through the cafeteria plan makes the benefit taxable again.
Participation. Carriers often need a minimum enrollment for guaranteed issue. Voluntary plans usually have lower participation and may ask health questions above a set benefit amount. These rules vary by carrier.
ERISA. A voluntary insured program is outside ERISA only if the employer makes no contribution, participation is completely voluntary, the employer’s only role is to let the insurer publicize it and collect premiums through payroll without endorsing it, and the employer receives nothing beyond reasonable pay for payroll administration (29 CFR 2510.3-1(j)). Employer-paid coverage is an ERISA plan.
A common middle path is employer-paid core LTD with voluntary STD or LTD buy-up.