Employer-sponsored disability insurance provides an important safety net for employees who become sick or injured and unable to work. It can also help employers to attract and retain top talent. However, not all group disability insurance products are created equally. This article will examine some of the different considerations when purchasing group disability insurance.
Why Should Employers Offer Group Disability Insurance?
Group disability insurance occupies a crucial middle ground between individual disability insurance, which is cost-prohibitive for most employees, and Social Security Disability Insurance, which has long wait times, onerous standards, and provides only modest income replacement. Because LTD benefits are reduced by other income sources, like SSDI, the coverage is relatively inexpensive and is deductible as a business expense. By offering LTD coverage, employers enjoy a competitive advantage when seeking to attract new talent. Furthermore, LTD insurance promotes worker productivity and retention by ensuring that employees who become sick or injured can take time off to rest and recover, without being deterred by the loss of income.
What Factors Should Employers Consider When Purchasing Disability Insurance?
When purchasing LTD insurance, there are many considerations that should factor into the decision, besides simply the cost. An inferior LTD insurance product is more hurtful than helpful, in that it lulls employees who might otherwise purchase individual disability insurance policies into a false sense of security. Before purchasing any group LTD insurance, be sure to first sit down with your broker and ask the following questions:
1. What Is the Reputation of the Carrier?
Ask your insurance broker what his or her experience has been with each carrier in terms of the number of claims approved and denied. Brokers usually hear from upset clients after a claim is denied. While anecdotal, your broker should be able to tell you what his or her experience has been with a given insurance carrier.
Aside from asking your broker, conduct some research of your own. Your state department of insurance is a valuable resource in that regard. For example, the Illinois Department of Insurance publishes annual reports detailing the number of complaints filed against each company relative to their market share.
2. Does the Policy Contain Discretionary Language?
The single most consequential provision in an LTD insurance policy is the discretionary clause. Typically, it looks like this: “The Plan Administrator has sole discretion to interpret the terms of the plan and make benefit determinations.” It is usually found in the very first pages of the policy, at the end in a section titled “General Provisions,” or attached to the policy in an “ERISA Statement”, or something similar.
The presence or absence of a discretionary clause has enormous implications for the rights of ERISA plan participants. If a policy lacks discretionary language, the denial of benefits is reviewed de novo, with no deference given to the plan administrator’s decision. If, on the other hand, a policy contains discretionary language, the lawsuit is treated like a review proceeding, and the plaintiff must prove the denial of benefits was unreasonable or the denial will be upheld. Discretionary clauses are so detrimental to plan participant rights that several states have banned them.
Before purchasing group LTD insurance, ask your broker whether the policy contains a discretionary clause. Ask to see a sample policy to confirm. Finally, even after the coverage has issued, review the policy to confirm there is no discretionary language (and if there is, repudiate the policy within the allowed time frame). Otherwise, the rights of plan participants (which includes you) could be in jeopardy.
3. Are the Benefits Taxable?
Another major consideration when purchasing LTD insurance is whether the benefits are taxable to the employee. If the employer pays 100% of the premiums, the LTD benefits are fully taxable to the employee. On the other hand, if the employee pays some or all of the premiums on a post-tax basis, the LTD benefits are tax-free according to the percentage of premiums paid.
Before purchasing group LTD insurance, ask if the carrier offers a “gross up plan.” Under these arrangements, the employees pay 100% of the premiums on a post-tax basis. Employers can “gross up” the employees by offering a raise to compensate them for the added premium cost. This arrangement is permitted by the IRS and enables employees to enjoy tax-free LTD benefits at no additional cost to the employee and only minimal added cost to the employer.
4. What Is the Definition of Disability?
Before purchasing group LTD coverage, ask about the definition of disability. Does the plan insure against the participant’s inability to perform his or her own occupation, any occupation, or some combination of the two? Make sure you are comfortable with the definition of disability. If not, consider requesting that the definition be changed to “own occupation” coverage (or even “specialty own occupation” coverage) for the full duration of benefits, or at least five years. Alternatively, you may request that the policy provide for different classes of participants: for example, executives enjoy “own occupation” coverage until retirement age but other employees only for two years. Be sure to consider the impact on employee morale of having different tiers of coverage.
5. What Is the Elimination Period?
Most LTD policies require that the claimant be continuously disabled throughout an “elimination period” of 90 to 180 days before they can receive disability benefits. When structuring your disability plan, consider the elimination period and the impact on employees of being without income for three to six months. Then, consider purchasing a group short term disability policy or else implementing a self-funded salary continuation plan so that disabled employees are not without income while they satisfy the elimination period.
6. What Are the Limitations and Exclusions?
Ask your broker about the LTD policy’s limitations or exclusions. For example, many, though not all, LTD policies contain a two-year limit on benefits for mental/nervous conditions. If mental health is a company priority, ask your broker to provide you with options for LTD coverage that contain no such limitation. You may be surprised to learn that such coverage can be obtained at the same cost, or even at a lower cost, than other products that contain such limitations.
Employers that choose to offer disability insurance should be commended. At the same time, they should exercise caution to ensure that the product offered meets the reasonable expectations of their employees. By following the steps in this article, you can avoid purchasing an inferior product. If you have any questions, do not hesitate to contact DeBofsky Law for a consultation.