With spring cleaning on our minds, be sure to include your long-term disability (LTD) plan when it comes to dusting off, reviewing, and possibly updating your group insurance offerings this year.
The time may be especially right considering the changes made to Canada’s Employment Insurance (EI) program in December 2022. You may want to take the opportunity to reinforce and communicate why your LTD plan is better than EI. Or you may want to consider synchronizing your LTD plan’s waiting period to align with EI’s longer duration of coverage (i.e., 26 weeks). (For more on the pros and cons of the new EI plan, click here.)
These questions and more are worth discussing with your benefits advisor to make sure you and your employees are getting the most value from your LTD plan. Take 5 spoke with Steve Hesketh, Managing Director and Partner at Acera Insurance in Kelowna, B.C., a member firm of Benefits Alliance, to pull together the following checklist to guide the review of your LTD plan.
When to talk about LTD
Hesketh acknowledges that an LTD review can be a tough sell due to the risk of a hike in premiums. “An employer goes through this process and realizes, ‘Gosh, this is going to increase the employee’s payroll deduction,’” he says. But making changes to LTD to ensure it properly meets the needs of plan members is paramount, he emphasizes.
When it comes to the actual review, resist the temptation to roll it into your annual renewal meeting. “Long-term disability is not a simple topic. There are many components to the LTD contract, and it warrants its own discussion.”
Hesketh also acknowledges that discussions around disability can be tricky. “It’s a complex benefit where most claims are not black or white.” Which is all the more reason why it’s worthwhile to revisit the coverage to determine the best course of action before a claim is made.
Update salaries
Make sure the carrier or provider of your LTD plan has the latest data for salaries. Employers could be liable if they haven’t reported current earnings and an employee goes on leave, says Hesketh. “I always ask clients, ‘Have you reported current earnings? Do you do this on a regular basis? Is it automated?’”
Report company growth
Insurers set a limit on how much LTD (and life insurance) they will issue to an employee without a medical examination. This is referred to as the non-evidence maximum (NEM) and is based on the overall volume of the group. As your company grows, you may be entitled to an increase in your NEM.
Communicate the NEM
Once you’ve revisited the NEM within your LTD contract, identify employees whose incomes would result in an eligible amount of LTD coverage that would equal or exceed the NEM. For example, let’s say a company’s NEM is $5,000, which means that employees would get up to $5,000 of monthly LTD insurance without having to submit medical evidence. However, an employee making $100,000 a year would be eligible for $5,558 in insurance (based on the typical LTD formula of 66.67 per cent of income, divided by 12 months), which is $558 more than the NEM. To receive that $558 per month, the employee must formally apply to the insurer, which includes submitting medical evidence.
It’s important to educate and encourage these employees to apply in advance for eligible amounts of coverage that exceed the NEM. This complex option is not well understood by most staff, including leadership, the executive team and owners, who are most likely to be impacted. Communicating why it matters, the additional premium cost and what they need to do requires consultation with your benefits advisor. Otherwise, you risk a claimant, possibly a key employee, unknowingly being underinsured at the time of claim.
Consider a graded formula
If many of your employees earn more than $60,000, consider a graded LTD formula or schedule. In a standard schedule, the amount of disability benefit cannot be greater than 60 to 85 per cent of the employee’s pre-disability income. This is referred to as the “all-source maximum” for disability income. However, employees with pre-disability incomes greater than $60,000 may stand to lose due to what’s called the “all-source maximum reduction,” which essentially caps the LTD benefit. A graded LTD schedule adds extra tiers of coverage to ensure plan members with higher incomes are not affected by the all-source maximum reduction.
Taxable or non-taxable?
Most LTD plans in Canada are non-taxable, says Hesketh, but they may not be administered properly. “If someone is disabled and the plan is non-taxable, that means they should have paid the premium through payroll deductions,” he says. Unfortunately, that’s not always the case. Some companies still share the premiums 50/50 with their plan members, embedding LTD in their benefits offerings. “To be CRA [Canada Revenue Agency] compliant, you need to isolate and label that LTD premium and deduct it from employee’s pay,” he says.
For C-suite employees, there are several options to consider with your benefits advisor.
One option is to make the LTD benefit taxable and pay the premium as a way to set yourself apart from competitors and attract future senior-level staff. Over the course of his career working with plan sponsors, Hesketh has found that senior executives who go on leave rarely submit a claim for LTD coverage. Instead, employers often continue to pay their salary for an undefined period of time, which is taxed. Meanwhile, executives still pay LTD premiums—which are much higher than the average LTD premium—for a non-taxable benefit that they’re least likely to use. It may make sense for the company to pay those LTD premiums and “let them take home more of their pay cheque,” says Hesketh.
If you go this route, a formal written policy is advisable, stating the duration of salary continuance while an executive is off work before they would be eligible for LTD benefits. And the LTD benefit should be adjusted to the maximum taxable schedule available from the insurer.
Another option is enabling executives to choose to enhance their coverage by purchasing a personal disability policy, typically with an enhanced definition of disability. The employer can purchase a group of individual disability policies to offer executives, or the executive can purchase the policy individually and the employer can pay the premium as a taxable benefit.
In all these considerations, it makes sense to work with your benefits advisor to help you do your “spring cleaning” when it comes to reviewing your disability coverage.