Even conscientious employers make mistakes in the administration of their Employee Benefit Plans – mistakes that could cost the firm tens of thousands of dollars. I know that because over the last few years I have met with dozens of employers and seen the potential liability in every one of the problems outlined below.
Providing an employee benefit plan is essential to attract and retain good employees. Benefits such as Long-Term Disability, Life Insurance, Critical Illness Insurance, and Health and Dental plans are found in firms down to as small as two employees. However, it is important to follow steps to ensure the good intent in providing a benefit plan doesn’t backfire for the employer. The purpose of this article is to alert employers to some of the common blunders that can lead to employee discontent and worse, possible litigation. You may question the use of the word “litigation”. Litigation can occur when an employee is expecting an insurance benefit, and due to oversight or administrative error by the employer, the benefit was not paid.
Another very important reason to pay attention to the benefit plan is that most employees depend on it! They likely have never investigated disability insurance and probably have less life insurance than their situation warrants. Furthermore, without a Health or Dental plan, essential curative or corrective measures may not happen because of cost.
The biggest mistake made by an employer is to delegate the selection and administration of the benefit plan to an employee who is not highly trained in benefits. Often the employee “in charge” of the benefit plan is inexperienced, overburdened by other responsibilities, only concerned about keeping the premium cost down, and unaware of the specific contract wording in the insurance policies. And, the employee in charge is not going to be liable financially for any errors, if the plan misfires due to administrative oversight or poor plan design.
This report will not cover everything that could be a problem, but here are some of the most common mistakes to look out for.
Not enrolling all eligible employees
Most employee benefit plans require “100% participation”. That means every “eligible employee” must be on the benefit plan. Usually, “on the plan” refers to the Group Life Insurance, AD &D, and Long-Term Disability (LTD). Normally, an employee may “opt-out” of the Health and Dental plan if they are already insured under a spouse’s plan. I have seen many instances where an employer allows an employee to opt-out of everything, because the employee says they are “on their spouse’s plan” – but the opt-out concept does not apply to Life and LTD.
Many people do not know about the 100% rule, because, in practice, if it is regular dental checkups and routine prescription drug claims going through the insurance plan, the insurer will not make a fuss about the 100% rule. (But legally they could if they wanted.) However, if there is a life insurance, long-term disability, or out-of-province medical claim, the insurer may do an audit of the plan, discover that not everyone who is “eligible” is insured, and deny the claim due to non-compliance with the contract. And who pays the claim at that point? Maybe the employer will find themselves in the insurance business.
Allowing employees to remove themselves from the benefit plan
The above comment concerned plans that require “100% participation). Some benefit plans require, for example, “90% participation” (90% of employees must be on the plan). Even if the plan only requires “90% participation”, it is recommended to insist all employees go on the plan. That way, you don’t have an internal dispute about which one or two employees are allowed “off” the plan. And if you have allowed someone to remove themselves from the plan, a precedent has been set that might cause subsequent new employees or other existing employees to want the same treatment. If that happens, it can put in jeopardy the firm’s ability to satisfy the “90% participation” rule.
Not offering the “top-up” Group Life or LTD
Most group benefit plans consist of a basic amount of life and LTD insurance that is available without the employee needing to answer any health questions. Then, there is a “top-up” amount available if the employee answers health questions to the insurer’s satisfaction. Some employers neglect or forget to offer this top-up portion to employees. If an employee subsequently dies or gets disabled, the employer is likely liable for the shortfall that should have been offered but wasn’t.
Not understanding the implication of “late applicant”
In a group insurance plan, there is an initial sign-up period when insurance is available without needing to do an insurance medical. An employee might miss the initial sign-up period, and then later, ask to be put on the life/disability/health/dental plan. The insurer will not give the “late applicant” the previously-available insurance benefits without passing an insurance medical. Or, the insurer will limit the amount of health and/or dental benefits available to the “late applicant”. If the employee cannot get all the coverage they could have had in the initial sign-up period, and the employer erred in handling the sign-up procedure, the employer could be liable.
Not advising the insurer of marital status changes or changes in “family coverage” waivers
An insured person who is “single” might change their status to “married and family”. Or, an employee who previously waived health and dental because they were covered under a spouse’s plan might want to reinstate that coverage because the spouse no longer has health and dental coverage. This too is a situation where the “late applicant” rules as outlined above apply.
Not requiring employee “sign-off”
There are many situations where an employer should keep an employee’s “sign-off” on file. For example, an employee may decline to submit health information to be insured for amounts of Group Life or LTD that are higher than what is offered without needing an insurance medical. In the future, the employee whose health worsens will change their mind about their decision to pass on the opportunity to have that extra insurance. In order to protect against a disgruntled employee, the employer should keep on file the employee’s signed declination of the opportunity to obtain the extra insurance.
Not understanding the definition of “income”
The amount of Group Life and LTD is based on a formula that relates “income” to the amount of insurance. “Income” will be defined in the Group Insurance Policy. “Income” could mean salary but might exclude bonuses or commissions or overtime. It is important that the employer read the definition of “income” so that there is no misunderstanding about how much insurance will be in effect. If the employer has over-promised coverage to an employee who gets disabled, the employer could be liable to make up the shortfall. Or, if the employer has under-reported to the insurer the “income” of a now-disabled employee, the employee could come after the employer for the shortfall in disability benefits, because the employee had no control over the employer’s mismanagement of reporting “income” to the insurer.
Not correctly measuring the “income” of an incorporated professional
This is extremely important today, as many professionals are incorporated and do not take income as traditional T4 salary. Instead, the CA distributes “income” as T4 salary, income-splitting to the spouse, and corporate profit or dividend income. Some Group Insurance plans recognize that an incorporated professional’s “income” might be all of those, however other plans only acknowledge T4 salary. Recently, I met a lawyer who had an incorporated practice. The lawyer had Group LTD with a major insurer that provided LTD of $5200 per month. However, for tax planning, the lawyer’s accountant had directed the lawyer to draw only $15,000 per year of “salary” and the rest of compensation as “dividends”. The major insurer in this case defines “income” as “salary”, therefore, if the lawyer gets disabled, the policy will only pay roughly $800 per month. In this case, the insurer had no flexibility, so we switched the Group Insurance plan to an insurer who acknowledges that other elements form part of insurable income for an incorporated professional.
Not registering changes in income
The amount of Group Life and LTD is based on income. An employer should report changes in income to the insurer as the change occurs. If an employer neglects to report increases in income to the insurer, and the employee subsequently dies or becomes disabled, there will be less insurance in force than there should be.
Both the employer and spouse are on the Health and Dental plan
Many firms employ the spouse of a shareholder or partner as a full-time employee. The spouse, if working full-time, should be on the benefit plan. However, the spouse does not need to be on the “Health and Dental” part if the other spouse has “family” coverage. In some cases, it might make sense to have both on the plan for Health and Dental, if the percentages paid by the Dental and/or Health coverage align a certain way. However, I have seen situations where premium is being paid to insure both for Health and Dental with no potential insurance value for insuring the second person.
Not understanding Long-Term Disability policy wording at the time of plan selection
Many group insurance plans are selected by cost and not by analyzing policy wording. An insurance policy is a contract and the wording should be torn-apart before selecting a plan. There are policy differences too numerous to mention here. The bottom-line is that when you need the parachute to open, it must open!
Not having a corporate policy for benefit continuation for disabled employees
If an employee becomes disabled and starts collecting LTD, they may be kept on the plan for other benefits. This has two financial implications for the employer: First, the employer may not be happy paying health and dental premiums for a non-active employee. Second, if the disabled employee is running high health and dental bills through the insurance plan, there could be upward pressure on the premiums paid by the employer in the future. It is recommended that there be a written corporate policy on the terms of continuation of insurance coverage that will apply in this scenario. That policy should be consistent for all employees.
Not filing a Long-Term Disability claim promptly
If an employee becomes disabled, the employer might not file the claim papers promptly because they are not sure if the employee will recover before satisfying the Elimination Period. Since insurers have a time limitation on filing disability claims, this is a huge mistake and can backfire in a number of extremely costly ways.
Including “non-eligible” employees on the benefit plan
Most benefit plans state that “actively-at-work” employees working more than (usually) 24 hours per week are eligible to be on the benefit plan. An employer might “help” an employee who only works 19 hours per week, by putting that employee on the benefits plan. If that employee submits an insurance claim, it is possible that an audit will reveal they should not have been on the plan, and the insurer will not pay the claim.
Including “non-eligible” employees (part two)
Very often, employers include contractors, former employees, temporary workers, and even the pal subletting a corner office on the benefits plan. Again, if the insurer finds-out the person was ineligible to be on your plan, claims will not be paid. If you are not sure if someone qualifies to be on your plan, outline to the insurer the specific relationship of that person to your firm, and ask if that person can be on your plan.
Not documenting if an employee paid for their LTD
If an employee paid the premium for their own disability insurance, and subsequently becomes disabled, they receive their insurance benefits tax-free. In the event of a disability, CRA may audit the payment of premiums. Therefore, it is very important to maintain accurate records on who paid the disability insurance premiums.
Not advising employees of decreasing insurance benefits
On occasion, an employee will find themselves with decreased benefits. For example, an insurer may change the provisions of a policy, or an employer may switch to a different insurer. It is recommended that employees be told of impending reductions in benefits, in case they have, for example, a dental bill that they could have run through the old plan, but is not covered under the new plan. Similarly, if benefits are reduced, employees might want to seek out personal coverage to make up for a reduction.
Hiring employees with the promise of “benefits”
Employees are often hired with the promise of “benefits” or “benefits the same as you now have”. There are many potential problems with a promise of this nature, since “benefits” are not all the same. For example, a small firm may not be able to offer “the same” benefits as a large firm. Also, I have seen situations where the obligation to provide “similar benefits” has resulted in the new employer being locked-into a plan that is expensive and/or not in the best interest of the employer. It is recommended that a copy of the benefits details be given to prospective employees, so they can evaluate for themselves what is meant by “benefits”.
Paying medical and dental bills on an ad-hoc basis
Some employers do not have an insurance plan. They simply pay prescription drug and/or dental bills submitted by employees. This has many pitfalls including defining what is an eligible expense and whether this arrangement generates the best tax-treatment. More importantly, this arrangement exposes an employer to privacy concerns, both now and in the event of a terminated employee looking-back.
Having an “owner/shareholder-only” Cost-Plus plan
Some group insurance plans have a “Cost-Plus” feature. I will not get technical, however this is a structure that allows for payment of medical and dental expenses that are not covered under the normal terms of the contract. This arrangement essentially turns non-insured health expenses into an employer-paid tax-deductible expense rather than a personal after-tax expense. Many of these plans have been established for the sole benefit of the shareholder/owner, excluding other employees. CRA does not like that, and in the event of an audit, the tax consequences are very bad. However, in some cases it is possible to establish a “class” of employees who are entitled to this benefit, and that “class” can include shareholders/owners. Talk to your tax advisor about this one.
Paying non-eligible medical expenses in a Health Spending Account or Health Trust
Some employers have set-up “self-run” health plans that pay for medical and dental expenses incurred by employees, using a third-party for administration. Some of these plans are paying for medical expenses that are not on CRA’s list of eligible expenses. If an audit discovers this, very negative tax consequences result. This is a complicated area and a conservative approach is probably best in the long run.
Not continuing benefits to a terminated employee during the severance period
If an employee is terminated and given severance, continuation of benefits during that period is often part of the arrangement. With some group insurance plans this is a challenge, in particular in the area of Long-Term Disability, but there are “severance Long-Term Disability” packages available to help an employer mitigate the risk.
Not providing a disabled employee with a copy of the group insurance policy
If an employee suffers a disability, it is very important they be given a copy of the actual policy wording – not the booklet wording! This will enable them to determine if they qualify for benefits, and help them anticipate what will happen through the process.
Thinking “the insurance company knew”
In most of the scenarios described above, the insurance company only learns about the oversights etc, after a claim occurs. Some employers think that by paying premiums, coverage is in force. However, if under the terms of the contract, the coverage should not have been in force, it’s likely not in force.
Other tips
Some observations about employee benefit plans include: Make your employees aware of what you are paying for their benefits. It is a valuable part of their compensation. Make them aware that their group insurance gives them coverage that they might not be able to buy on their own as individuals, because they couldn’t afford it, or they couldn’t pass an insurance medical. Tell employees about the Employee Assistance Plan (if you have one) so they deal with problems, and stay emotionally healthy. When considering a plan change or the implementation of a new plan, try to avoid “putting it to a vote”. There will be some employees who want the plan because they are responsible people, or have a health reason for wanting a plan, and other employees who are “superman” or “superwoman” and don’t believe in insurance. A vote can create employee dissension.
Summary
Not making plan administration a priority is the situation that must be changed. Most of the problems referred to above can be avoided with simple processes that handle new enrollments, changes in income, and other factors. The administrator of the group insurance policy must be a capable, detail person.
In my experience, it is essential that the owner of the firm is involved when a new policy is put in place, and at the annual group insurance policy review. It is the owner of the firm who will be dragged-in if a problem occurs, and it is the owner who has the biggest vested interest in making sure things run smoothly.
Fortunately, most benefit plans run smoothly and are a great source of satisfaction for employees.
Please note that the above comments are in my words and are discussing general concepts. The remarks above do not refer to a specific insurance policy or contract. Please read your group insurance policy (not the employee booklet) to see how the above concepts relate to your plan