Mitigating Risks: Addressing Employee Benefits Liability Challenges

Avoiding employee benefit liabilities is relatively straightforward with a good understanding of employment laws, benefit taxation, restrictions from benefit providers, and having clean, up-to-date data. However, even in the most straightforward scenarios, there are hidden liabilities that can cost a firm money and its reputation.

Two key situations you encounter on a regular basis can create significant liabilities. Let's review how to properly handle them and protect your business.

1. Your employees waiving coverage or opting out.
2. Regular updates such as life changes, salary changes and terminations.

We've also prepared advise on the effective strategies to reduce risk of your benefit plans becoming a liability and avoid administration errors:

• Choose a mandatory plan over a voluntary one
• Make sure you are paying the right premiums
• Seasonal and contract employees may also be eligible for benefits
• Know the rules for multiple companies on the same benefits plan
• Get employee benefits liability insurance

1. Waiving employee benefits 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.

2. The following changes could potentially result in liabilities 

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.

How to reduce the risk of employee benefits liability? 

These decisions are often made when a plan is first established and may not have been reviewed or updated recently. Best practices suggest that the following items be considered annually. 

1. Choose a mandatory plan over a voluntary one

When it comes to offering your benefits package, 100% enrolment is the safest way to ensure all eligible employees are covered after the applicable waiting period. However, in some instances, employers prefer that enrollment be voluntary.

An important thing to note is that in order to offer a voluntary plan, most insurers will require a minimum participation rate of 75% for health plans. When joining the benefits plan is optional, your business can be exposed to hidden liabilities in the following ways.

Not Meeting the Minimum Participation Rate

Unfortunately, voluntary enrollment creates a level of unpredictability. You may be under pressure to meet the requirement of a 75% participation rate by your insurer. If 25% of your employees have refused the benefit plan, how can you ensure that no one else chooses to opt out?

By providing employees with the option of voluntary enrollment, while attempting to bring up participation to meet the threshold, there might be a reputational risk. This can create an imbalance in the workplace, and disgruntled employees in the long run.

Employer Liability Regardless of Employee Denying Benefits Plan

Your employee has chosen to refuse the benefit plan. This may be due to a perceived lack of need for the benefits, having coverage through their spouse or a lack of desire to pay premiums. Regardless of the reason, if they or a family member later develop a serious illness and wish to join the plan, what does this mean for your company?

With the exception of a spouse losing coverage through their employer, the insurer is under no obligation to extend benefits. If the insurer refuses, the employee will likely look to you to cover the cost of their medical expenses. Even if a waiver has been signed, an employee, his spouse, or dependents may take you to court claiming that they never fully understood the consequences of waiving the benefits. 

One further point on voluntary plans is that liability may also exist with retirement and savings plans. It is possible that an employee who fails to save sufficient funds for retirement or who invests unwisely may seek redress from a former employer. It is generally recommended that all eligible employees be given the opportunity to join the plan each year. Should an employee refuse to join the plan- especially one with an employer contribution- a new signed waiver should be placed in their file annually.

2. Make sure you are paying the right premiums

The allocation of premiums between the employee and employer and the tax implications that result are often misunderstood. With any cost-sharing arrangement, employers are required to pay a minimum of the total premium. The threshold is usually 50%.

Best practices have the employee pay the premiums for the taxable benefits such as life, AD&D, and CI through payroll deductions whenever employees are responsible for paying part of the premiums. In cases when an employer pays 100% of the premium, the taxable benefits must be reported on the employee’s T-4. Taxable benefits may vary between provinces, so it’s important to base the allocation of premiums on where your employee works.

The cost-sharing for Long Term Disability premiums is unlike the benefits mentioned above and depends on the contract with the insurance provider. If Long Term Disability benefits have been set up with a non-taxable schedule, it is important that the employee pays the full premium. Any payment by the employer will result in the benefit being deemed taxable by CRA.

As a result of this, the employee will receive less income than expected during a time of significant need. In this instance, the employee may look to you to make up the shortfall. Of course, an employer can pay the disability premiums but it’s important to ensure that a taxable disability schedule with a higher replacement percentage is put in place with the insurance provider.

3. Know the rules about multiple companies on the same benefits plan

There are very specific rules about having multiple companies on the same benefit plan. This includes holding companies, sister companies and subsidiaries in your corporate structure. Generally speaking, insurers require a minimum of 50% in common ownership between the contract holder, usually the main operating company, and sister companies or subsidiaries. Once the minimum ownership threshold is met, it is important that each related company be named in the contractual documents.

If employees from a company with less than the required ownership percentage are included in the benefit plan, the insurer may deny coverage. The danger of not conforming with the minimum ownership rule is that while payment for routine health and dental claims will be paid, other more costly claims such as disability, life or out-of-country claims may be denied, leaving your firm liable.

One other point to note is that if shareholder-employees or incorporated professionals, such as lawyers, are being paid through their holding companies rather than directly from the operating company or partnership, you must ensure that the holding companies are named as affiliated companies in the contracting documents. 

4. Seasonal and Contract Employees

When long term seasonal and contract employees work for a company, the most common question is “Can I jump onto your Group Benefits plan?”. Because these long term seasonal and contract workers seem like “regular” employees, plan administrators often reply YES”.

However, they may be over-promising. Leave the company liable to pay claims out of its pocket because the worker was not eligible to be enrolled or not eligible for the same coverage as your regular employees.

Insurance carriers have strict rules around offering benefits to seasonal and contract workers. Most commonly, they will not offer disability benefits.  

Before a carrier will give approval to add a seasonal employee or contactor to the benefit plan, they will want to know the following:

• How many hours per week do they work and how many months a year do they work?
• Does this person have annual contracts or multi-year contracts?
• Does this person only work for the one employer or do they work for multiple employers?
• Will the employer make payroll deductions?

Depending on how you answer the above questions, an approval may or may not be forthcoming.  

Also, if you receive approval for the seasonal employee or contractor, you must offer the benefits to all seasonal employees, not just one person. It would be discriminatory to offer only one person benefits and not everyone in that same class.

5. Get employee benefits liability insurance

Employee Benefits Liability (EBL) insurance is a specialized form of liability coverage that is designed to protect employers from financial losses related to errors or omissions in the administration of employee benefits programs. This insurance policy covers legal expenses, settlements, or judgments related to claims of mishandled employee benefits, such as health insurance, retirement plans, disability benefits, and more. EBL insurance helps mitigate the financial risks associated with errors in managing employee benefits, which can result in disputes, lawsuits, or regulatory fines.

The cost of EBL coverage varies depending on the number of employees the policy is meant to cover. Businesses should expect to pay a deductible of around $1,000 for each claim filed. EBL insurance is affordable for most businesses and is recommended for those who employ more than a few workers and offer benefits.

Next Step

Even though these risks exist, there are ways of protecting your company from them. Being aware of these liabilities, and knowing how to correctly administer a benefits plan can help you save money and reduce stress. Having an advisor who you can inform in advance of any anticipated changes will ensure that your employee benefits plan does not become a liability to your business. A well-designed and administered benefits plan is valuable to your company and your employees.

Download our webinar recording below to learn more.