Tuesday, July 14, 2009

How Safe Are Your Benefits?

For people who worked for a company with an employee benefits program twenty years ago, the concept of "paying" for some of their benefits would have been considered ridiculous. Well as I have stated many times before, the times they are "a changin".
Nowadays, pension plans are in "deficit" positions and employees wonder what else could happen. Last week, a VERY BIG SHOE dropped. I'm sure that most people didn't even notice this headline, but for some people, it will dramatically affect their future.

Many years ago this major company, who spent money in questionable terms, whose stock market rise enabled a few people to get rich, and many times that number of people made poor, announced that their "disability program" was in jeopardy. The company which shall remain nameless (I don't feel like taking on their lawyers although I imagine they cannot afford them anymore), was a major global player in the fibre optics field and the largest company on the Toronto Stock Exchange 10 years ago. In a National Post article on July 8th, it was explained that the company's disability benefits program was not a true insurance program. Rather the company had created an administrative services only(ASO) plan and was "self insured".

Of late I have seen some excellent articles on why we "insure" things (our home, car, life, ability to earn an income). I will provide some more information in a coming blog that better explain the benefits. The problem here is that the company stopped "insuring" their employees through an insurance company. The company decided to take on the risk themselves to save money. Now they are going through bankruptcy and the employees who are currently on disability may be left out in the cold along with other "creditors". How could this happen you ask? Could it happen to you?

Benefits are offered by companies as a way to attract and retain employees. They are a tax- effective form of compensation for the company and many people consider "benefits" after income as primary reasons for choosing an employer. When times are good, benefits attract employees; when times are tough, they remain a principal reason for the downfall of companies. General Motors was a good example - it is not the wages they pay their staff that hurt, it was the cost of the "benefits" that drove them into bankruptcy. Benefits are made up of but not limited to the following:

  • life insurance and disability insurance
  • health and dental insurance
  • retirement benefits

In previous blogs I have discussed the problems facing some types of pensions (defined benefit plans). Life insurance is almost always a component of a benefits plan - if you have a sufficient number of employees, everyone can have some basic coverage without a medical. Once you cross a threshold, then medical requirements are needed. Disability insurance works in a similar fashion. Health and dental coverage provides reimbursement of covered expenses to maximums under the plan. Most employer go through an insurance company to insure their plans, especially smaller companies. The reason is simple - insurers have thousands or even millions of people insured which spreads out the risk. They take a percentage of the premiums paid to cover the administrative costs and profits.

What happens in an administrative services only(ASO) plan? Essentially, the employer takes on the risks associated with the plan and simply hires an insurer to "administer" the plans. Rather than buying insurance to cover employee benefits, companies can create their own trusts to provide benefits directly to employees, and use insurance companies to simply administer those benefits. But while ASO arrangements offer some tax and premium savings to employers, they put employees at risk when the company hits rough waters.

"It's not insurance; there's no insurance guarantee," says Frank Zinatelli, vice-president of legal services for the Canadian Life and Health Insurance Association (CLHIA).
There are more than a million Canadians whose LTD are covered by ASO arrangements, and whose coverage may be in jeopardy if their companies go under. If an insurance company goes bankrupt, its policyholders would continue to receive their LTD payments from Assuris, a non-profit company set up to deliver payments.

This type of arrangement can make very good sense for both the company and employee to cover dental benefits or perhaps even covering the health insurance portion of their plans. The disability or life insurance portion of the plan? Not in my eyes. As we have already seen with this company, people already on disability may now be in jeopardy as to their future income benefits.

The next time the discussion of "benefits" comes up, remember this blog entry. If you have a question about your plan, ask an advisor but not the one that sold the plan. An answer from a disinterested third party may open your eyes.

As always, Stay Well and Pay It Forward.

1 comment:

Anonymous said...

Makes me wonder about my own plan.