Hidden Liabilities in Administering Canadian Employee Benefit Plans

Congratulations! You’ve implemented an employee benefit plan to attract and retain staff. You’ve designated someone in your office as the plan administrator and you feel confident that the administration of that plan is easy, and you are good to go.

Or are you? Even in the most straightforward scenarios, there are hidden liabilities which can cost a firm money and its reputation.

There are several key areas that can create significant liabilities. In this two-part blog, we review some of the top areas to help shield your business from the risks associated with administering benefit plans. First, we will tackle the activities you encounter on a regular basis.

Waiving Coverage or Opting Out

Many employees and some plan administrators are unaware that an employee can waive extended health and dental coverage if they have equivalent coverage elsewhere. For most people that means coverage through their spouse’s plan. However, some plan administrators make the mistake of allowing employees covered through their spouse to opt out of all benefits.  

It is important that waiving coverage is done correctly. Pooled benefits such as Life, AD&D, Critical Illness, and Short & Long Term Disability are generally mandatory. Even with a signed waiver, a disabled worker or the estate of a deceased employee may look to your company to pay the forsaken benefits, potentially costing your company tens or hundreds of thousands of dollars.

Be Cautious of the Following Changes When Administering an Employee Benefits Plan

Life Changes

Major life status changes-- a new baby, cohabitation, marriage ---- need to be reported within 31 days of the event to ensure coverage is active and to avoid late applicant restrictions. The insurer may agree to extend the deadline if there was an honest administrative mistake. However, if the plan is being administered poorly, for example, protocols are routinely ignored, a potential liability awaits. Late applicants can be subject to medical underwriting and benefits may be refused by the insurer.  Your employee may then seek payment from you to make up any shortfall in coverage.

Salary Changes

It’s the plan administrator’s responsibility to disclose pay increases, class changes, or changes in hours worked, Often salary changes affect Life and Disability Insurance amounts. Make sure changes are completed within 31 days and that employees be given the opportunity to apply for additional coverage even in cases where medical questions are required. Under-reported income or incorrect classification can lead to improperly paid benefits leaving the employer to make up any shortfall.  In one recent example, an employer failed to report a salary increase, the employee became disabled, and the employer was required to fund the missing $500 of the monthly benefit for the duration of the disability.

Terminations

There are several areas of consideration when an employee is terminated.  

Confirm insurers will extend benefits for severance

If severance is offered and you would like to extend benefits to these employees, it is important that the insurance company is sent a request and grants this request in writing. Most insurers will not extend Group LTD beyond statutory requirements, which differ by province, due to the fact that the plan member is no longer actively at work. There might also be restrictions on life insurance or out of country coverage. If you have stated that the benefits will be extended during the severance period without first receiving agreement from the insurance company, you may be liable for the payments associated with the benefits denied by the insurer.  

Be cautious of pending or active disability claims, and maternity or parental leave

Potential human rights complaints from employees whose benefits are terminated prematurely can be very messy. Areas to watch out for include, pending or active disability claims, and maternity or parental leaves. Employers are required to extend benefits to an employee on maternity or parental leave. If a cost-sharing arrangement exists, the employee must be given the opportunity to pay their share of the premiums. One point to note, an employee may choose whether or not to continue with LTD premiums while on leave. Generally speaking, it is important to maintain benefits for an employee with a pending disability claim. Once an employee’s disability claim has been approved, we suggest consulting with an employment law specialist prior to terminating a disabled worker. The issues can be complex and there is no one size fits all solution.

(To learn more about how a benefits advisor can help you, see also: Why Work With an Employee Benefits Advisor?)

Inform terminated employees of conversion options

Make sure you share information with terminated employees on their right to convert various group benefits into personal plans. Benefits available for conversion will vary from plan to plan and carrier to carrier but generally speaking group life insurance has a conversion privilege. It is important to inform employees of this right, as this gives them the opportunity to continue their life coverage even if they might not qualify for personal coverage due to their medical history. In some cases, long-term disability insurance can be converted to a personal plan and several insurance companies offer individual health and dental plans that can be obtained without requiring health information, provided that the application is made within 60 days of leaving the group plan.

Reinstating Terminated Employees

Many businesses have hiring cycles. Often, when a company ramps back up its production, it looks to grow the workforce by rehiring employees that were recently terminated. When employees are rehired, regardless of whether it's in the same role or a different one, companies must abide by the reinstatement clause in the Group Benefits contract. The clause most commonly states that employees who are re-hired within 6 months of their termination date, are entitled to have the waiting period waived thus the Group Benefits re-start the first day of full time employment.  

Be sure to check your contract to ensure you know what the reinstatement clause is before re-enrolling employees or offering employee benefits under different terms or conditions. Insurers are not flexible with the reinstatement rules.

Next Step

The goal is not to scare you away from offering employee benefits, it’s the contrary. An employee benefits plan is just that, a benefit, not a liability. Don’t let your employee benefits plan become a liability to your business. A well-designed and administered benefits plan is an enhancement to your company and your employees.

Download our webinar recording below to learn more.