Disability plans can discriminate
Long-term disability insurance replaces a portion of the income of an employee who is unable to work for an extended time due to an accident or illness such as cancer. Most large employers provide a medical plan to cover the majority of costs for the necessary medical treatment in either of these situations.
But what about the paycheck the employee is no longer receiving? The employee’s need for cash to cover expenses such as mortgage payments, groceries and childcare usually remains unchanged. However, the flow of cash into the household changes drastically. A severe illness or injury can also result in the need for daily living care, also known as long-term care, which may not be covered under a medical policy. The high cost for such care can deplete an employee’s savings and retirement funds.
A typical group-disability plan will pay disabled employees 60 percent of their pre-disability income up to a maximum benefit, $5,000, for example. An employee will begin receiving this benefit after having been disabled for a specified time, typically 90 or 180 days.
For most employees, this plan design is adequate. In some instances, however, especially in professional organizations such as attorney firms or medical clinics, the maximum benefit is well below 60 percent of the monthly income for a segment of the group. This reverse discrimination can leave a large gap in coverage for your most valuable employees.
How real is the threat of disability to these highly compensated employees? According to a 1998 study by the National Institute on Disability and Rehabilitation Research, 17.2 million people - one in 10 of the working-age U.S. population - had disabilities that interfered with their abilities to work.
In 1994, adults 25 to 64 experienced a total of more than 184 million injuries or illnesses that required medical attention or restricted activity or both. In 1996, 4.4 million U.S. workers were receiving Social Security Disability benefits.
Here’s a hypothetical example of how limited disability benefits affect highly compensated employees. ABC medical clinic has 40 employees: 10 physicians plus registered nurses, licensed practical nurses and office staff. The physicians each earn an average of $200,000 per year; the rest of the employees each earn an average of $50,000.
ABC provides a group long-term disability plan that pays 60 percent up to $5,000 per year. This plan is adequate for all the employees except the physicians. The physicians earn an average of $16,666 per month; therefore, a 60 percent income-replacement benefit would be $10,000. However, because of the $5,000 limit, the most valuable employees, those who generate income for the clinic, would receive only 30 percent of their monthly income.
What can you do about this situation? Most employers assume that the answer is to increase the maximum benefit on the group policy to $10,000. However, in many cases the insurance company imposes restrictions that make it impossible for the employer to provide the desired benefit.
One option is to purchase individual disability policies for the affected employees to provide the additional income protection. Many insurance companies will offer a discounted rate for the individual policies if a minimum number of policies, usually three or more, are written. The discount can be as much as 25 percent.
Using individual policies to avoid discriminatory group disability plans provides advantages:The individual premium typically is guaranteed not to increase after the policy is issued. Group premiums can and do change annually. Individual policies are portable, so employees can "take it with them" if they leave the company; group plans are contingent on continued employment. This approach allows employees to select riders that will increase benefits as their incomes increase, without having to undergo new medical exams. Over time, individual plans can help to stabilize rates for the group plan.If you sponsor a group disability plan, it’s a good idea to review the plan provisions periodically to be sure it still meets your business needs.Terry Allard is an account executive at The Wilson Agency LLC in Anchorage and president of the Alaska Association of Health Underwriters. She can be reached by e-mail at ([email protected]).