Supplemental disability income insurance coverage is an added layer of protection used to help fill the gaps left by most employer group disability plans, most often with executives, highly compensated, and variable compensation employees.
Many companies provide group disability coverage for employees with a maximum benefit of 60 percent of their base compensation, not including bonus compensation, and a monthly maximum benefit cap ensuring that highly compensated workers will only receive 25 to 44 percent of their salary. What’s more, employers usually have to pay tax on the benefit received from group plans.
Solving Disability Income Disparities
Some companies try to compensate for this inequity by raising the group plan maximum limit, e.g., above the 60 percent maximum limit. But higher maximums raise the premium rates for all employees, creating a tremendous claim liability for the entire group:
“If one executive becomes disabled, the claim reserve is huge and, inevitably, the extra claim reserves will cause the premiums to increase for the entire group,” says Director of Brokerage Kenneth Carlson of MassMutual.
“The net result is that the company pays more for a high monthly maximum group disability plan while accepting more risk exposure, usually without any medical underwriting,” adds Carlson’s colleague at MassMutual, Worksite Practice Leader Hal Sizer.
“HR director’s need to ask if they’d like a simple and consistent income replacement plan, or one where some workers systematically get less than others?” Sizer adds.
Employer-Employee Shared Responsibility Model
The problem is particularly egregious for sales professionals and others paid by variable compensation, including division heads, who get most of their income from commissions and income-based bonus. Carlson and Sizer espouse a hybrid solution that’s emerged to address this problem—a kind of shared responsibility model between the employer and employee. The hybrid model is designed to provide an income replacement option for variable comp workers and executives, while calling on employers to step in to fix the most obvious problems.
Carlson and Sizer cite a group of commercial real estate brokers they worked with in the northeast, where 27 of the top 60 income earners were positioned to receive less than 40 percent of their salary on disability. A simple solution would require an additional $100,000 investment from the employer to make the problem go away—but that simply wasn’t an option for their budget.
“So we found an amount that was comfortable—in this case the employer paid an additional $40,000—and this addressed the most egregious inequities and enabled each employee to receive a flat $5,000 a month to help bridge the income replacement gap. But there was also an option for brokers allowing them to choose an additional individual supplementary disability benefit to make up the rest,” says Sizer.
“We administer the enrollment process during April or September—off-cycle with benefits open enrollment so as not to steal shelf space—and employees simply check a box to receive an additional $6,000 a month, or whatever they qualify for, on top of the flat $5,000 of coverage. Relatively modest premiums are then paid through payroll deductions,” says Carlson.
Employee Retention Value for Employers
“Variable compensation employees are perceived to be a flight risk and could be very employable somewhere else, so this type of income replacement plan could have employee engagement and retention value, causing the representative to pause before leaving their present employer, where they have a $20,000 plan for income replacement, for example,” adds Sizer.
The policy is also portable and the discounted rate remains in effect, even if the representative leaves the company, and companies like MassMutual work very hard to reduce the employer’s administrative burden by offering a seamless data interface during the employee benefit transaction process.
Does this reflect your experience with supplemental disability insurance? Have you discovered another creative solution? Share your thoughts below and, as always, feel free to contact me with questions and requests for further assistance at RRuotolo@Lockton.com.