Stop Loss Protection Gives Voluntary Plans New Appeal

A new application of a proven concept can give employers the flexibility to manage an expensive issue.

By Deborah Kweller

Employers in states like California, New York and New Jersey that have mandated disability programs have long faced a "catch-22" when attempting to self insure and better manage their disability. In general, self insurance is attractive if a company's loss experience looked to be better than the state pool's. White collar, male dominant industries, for example, typically have lower loss experience than blue collar industries.

The "catch-22" arises, however, when a company tries to do the math: Disability data is handled by the states, which don't report the loss experience of individual companies.

The advantages of self-insuring can be significant. First, at the end of a good year employers can give workers cash (and non-taxable) refunds of excess employee contributions or use the surplus to fund additional benefits. These could range from specific programs such as a health improvement center to more general relief from rising insurance copays.

Second, employers can take advantage of their hard work to control costs through professional administration of plans tailored to their specific workforces. That has become more important as employee contributions increase astronomically. California, for example, has locked in a 71 percent increase over the years 2002 through 2005 that will take the contribution up to $714 per employee. Some employers choose to pay the contribution for their workers, a decision that makes any benefits taxable income for the employee. Neither the employer nor the employee benefits, however, if the firm does a better than average job of managing disability.

On the other hand, if the company steps out of the state's program and suddenly incurs an unusually high rate of loss, it has to "pay the piper" by loaning its plan money, and the loan will only be repaid if the company experiences a lower than projected loss rate in a subsequent year.

Insurers are starting to respond to the problem with stop loss products. In California, for example, Aetna Life Insurance Company is offering an Aggregate Disability Stop Loss plan that — as the name implies — reimburses the self-insured employer when claims exceed 25 percent of annual estimated costs.

Sweetening the pot

For years, voluntary plans — so called because employees can choose whether to stay with the state or be covered by the employer-sponsored plan — have been available to California employers as an option to SDI coverage. Such programs are required to do three things: provide all of the benefits of SDI, provide a richer benefit in some way and cost the employee no more than the state plan.

Many of these plans can easily offer a much richer benefits package because there is greater flexibility for the employer and the professional plan administrator. By focusing on just one company, they can design a benefit plan that mirrors the true needs and interests of the employees. Any surplus that results can be accumulated indefinitely, or else used to reduce employee SDI costs in subsequent years or, as mentioned earlier, to fund new health benefits or give cash back directly to employees.

An employee will realize another advantage in the way disability benefits are calculated if they become disabled. California bases its benefit rate on the highest quarterly earnings in the 12 months beginning 18 months before the disability. This is particularly harsh on employees who have just moved to the state, for example, as they may be entitled to only a minimum benefit or none at all. A voluntary plan eliminates the previous earnings requirement for newer residents.

Longer-term residents can also experience significant advantages, because their current earnings usually exceed those of the state's 18-month old base quarter. What's more, a voluntary plan can base its calculations on total earnings, including bonuses, and not just the portion that would be subject to the disability insurance payroll tax under the state plan.

In addition to more generous benefits, voluntary plans are also in a position to set their own eligibility requirements and length of elimination period.

Finally, in real life, most employees want to get back to work as quickly as possible. Professional plan administration supports that goal with rehabilitation and return to work programs. As a result, the average duration of claims experienced by most voluntary plan administrators is around eight weeks compared with the state's average of nearly 14 weeks.

Set up, in a nutshell

Employers usually work with third parties to design, implement and administer voluntary plans. The first of the basic steps is to determine the eligibility rules, benefit rates, waiting periods and mutual responsibilities that best suit a particular company and its workers. Next is disseminating information to employees. E-mail distribution of self-explanatory literature has generally made enrollment meetings typically unnecessary.

Employees then "vote" on the plan by choosing whether or not to participate. The plan is authorized if a simple majority say, "Yes." If 85 percent choose to participate, new employees are automatically enrolled unless they specifically request to participate in SDI.

The next step is preparing the application for state approval and securing a guarantee bond. The voluntary plan administrator will calculate the amount of the required bond and work with the company's insurance broker to secure and file the bond with the state.

Deborah Kweller is president of Innovative Care Services, a Torrance, Calif.-based third-party administrator that provides a broad variety of insured and self-insured's claims administrative services, including voluntary plan administration. She can be reached at 707-935-1149 or via e-mail at dkweller@innovativecaresystems.com.

Deborah Kweller. Stop Loss Protection Gives Voluntary Plans New Appeal.

Business and Health

2003;1.