The Compliance Traps, Administrative Nightmares, Subtle Discrediting & Employee Frustration Voluntary Benefits Often Bring
Special guest column by Dagny Taggart | March 2023
As a wee lass, my grandmother used to admonish, “don’t go
borrowing trouble.”
I only fully internalized or “grokked,” as the kids say,
that message once installing voluntary benefit plans.
In the eyes of the ginormous corporations that have devoured
nearly all the insurance brokerage market, I’m reasonably sure this makes me a
bad broker. Because, you see, once you are publicly traded, your stock prices
and your national VP’s job are tied inextricably to the holy grail of
growth. Client retention is nice and may
even earn you a pat on the head or some other form of little doggie treat, but growth,
my lass, well, that shall set ye free!
I’ll never forget a conversation with a notoriously
unscrupulous brokerage owner in the San Francisco Bay Area. We were at some
stuffy, pompous, self-congratulatory industry meeting where brokers take a
temporary leave from the golf course to discuss how to best grow revenue (your
premium).
The greasy, slick-haired, dark pinstripe-suited,
mafioso-looking founder told our CEO, “I’ll never understand why you put so
much stock in retention. Once a client has identified that you cannot service
them as promised, it will still take them nine to eighteen months to leave for
a new broker. You can sell a handful more groups in that time!”
Even though that was nearly 25 years ago, very early in my
career, I always remembered the message.
And I hated it increasingly each year I practiced.
As a brokerage office is purchased by a bank, merged with
another bank, and repacked to a private equity firm like every other financialized
product in our country, brokers are inevitably hounded with the mantra of
growth. New sales conquest lists are circulated monthly, sometimes weekly, to
prod already organically competitive salespeople to climb over each other to
push more premium dollars through their P&Ls. One company I worked with
even created a gameshow-like point system to maximize salesy behavior.
Referrals to decision-makers, cold calls made, meetings attended, and spam sent
all earned various forms of atta-boys from the official brass. Meanwhile, 20-plus-year
veterans who consistently renewed multi-million-dollar books of stable clients
were regarded as an annoying relic to a bygone era in American Business: a time
when steady service, professionalism, and integrity hindered the mantra of G-R-O-W-T-H.
Enter Voluntary Benefits
Voluntary benefits offer a quick fix for a stagnant book of
steady, satisfied clients. It is the cocaine bump from the countertop in the club
bathroom when a partier doesn’t have the energy or personality to peacock with
the amplified type-As. With voluntary benefits, an employer can roll out
additional life, disability, accident, cancer, critical illness, pet, home,
auto, gap, dental, vision, or hospital insurance at no cost to the employer and
only for those employees who want to purchase it. As the pitch goes, it rounds
out your offering, maximizes choice, and gives people more opportunity to cover
what is important to them. Who could be against that?
And I must admit, as a budding, libertarian-minded little
brokerita, I bought into the concept. Voluntary benefits were, after all, voluntary
and offered commission to the brokerage of an additional 15 percent to 55
percent, depending on the line of insurance offered. Employees win, the
employer wins, and the broker wins!
Alas, there is no free lunch. Imagine a product that is half
commission. How can an insurer afford to sell you something that is half
commission?
Hint: it is not by undercharging for the
product.
What’s the Real Message?
As much as every broker and I want them to be, your
employees are not benefit experts. Let’s be frank: your HR team probably isn’t
either – at least most aren’t. In fact, your employees hate dealing with
benefits, particularly the insurance side, so much that they spend an average
of eighteen
minutes making open enrollment decisions. By contrast, they will spend four
hours on the decision to buy a cell phone. Priorities.
No array of glossy brochures, automated video open
enrollment meetings, or highly entertaining broker personalities [ahem] will
drastically change that. A fantastic broker and presentation package might
get their attention for forty-five minutes. And I know because I regularly do
[smiling].
When we add V.D. (what I call voluntary dental) to your
plan, as an example, we will divert attention away from where eighty percent of
your benefits budget goes – toward medical. Why would we do that? Of course, if
all you offer is medical and V.D., that is not a problem. But most employers
offer employer-paid medical, life, dental, vision, employee assistance
programs, and disability. Communicating that to employees takes the entire
forty-five minutes. If we attempt to add the laundry list of other items from
earlier in the article, we confuse and frustrate your audience.
But what else are we effectively saying?
Our benefits are not good enough to cover you and your loved ones should tragedy befall you or your family. Sure, we offer you a few employer-sponsored items, but you probably need to buy all the other items this pushy salesperson is here to deliver. There is a watering-down effect, and you taint the vital quality plans like group disability and medical with the lottery-esque nature of cancer or accident policies. It’s what my 20-year-old daughter would call a “low-key dis.”
Pro Tip: Brokers don’t buy the laundry list of benefits. Brokers buy medical, disability, and life if we have dependents and are in a phase of life without enough assets to cover mortgages and college tuition. Everything else is superfluous. One of the best things we can do as insurance and human resources professionals is to help educate our employees on the real need for insurance. Insurance is for the huge risks we cannot plan for or save for: death, disability, and serious medical issues. We can and should be able to save and plan for dental, vision, accidents, pet issues, etc. If one can’t, then they just aren’t trying. If you set aside the money you’d pay in premium toward your dental, vision, etc., you will have that money when the need arises; and you will not have to hand over 15% to 50% in commission and another 10% for carrier profit.
Administrative Hell
Much like third-party administrators and human resources information systems, voluntary benefit providers systematically over-promise and under-deliver. Here is a partial list of what every employer should expect when installing new voluntary benefit plans:
- The carrier will not enroll all of your employees correctly. There will be some with misspelled names, incorrect dates of birth, wrong benefit plans, and incorrect family tiers. Some may be dropped from enrollment entirely for no good reason.
- This will increase the HR department's workload and hours will be spent on the transition. It will also cause disruptions to the organization due to meetings, forms that need to be completed, and the inevitable discontent from some employees.
- If a company is going to add voluntaries, the CEO or other high-ranking executive should announce the change - and the business reason why - before the meetings.
- Depending on the type of product you offer, you may have to meet minimum participation levels. This means, for example, if 20% of your employees don’t elect to buy additional life insurance, you will not be able to offer it to any of them. And you may have just had 15% of them sign up. Now you get to go back and tell those 15%, “nevermind.”
- The first bill will not be accurate. The client must audit the first bill immediately upon receiving it and notify the carrier of changes. A binder check for the first month's premium is required with the master group application and will be credited on the first or second billing cycle. Therefore, your first few bills are not likely to be accurate.
And that list assumes you already boast a savvy and robust
HR team. If you have new or inexperienced folks on the team or if you
experience regular turnover in HR, these matters can grow unruly in a hurry.
One Midwestern company I worked with churned through three
different benefit managers in eighteen months. HR was responsible for sending
an evidence of insurability form to employees who applied for more than the
voluntary life’s $100,000 guaranteed issue amount. That crucial detail was lost
in the shuffle. So, tensions rose when the employer experienced the death of an
employee who thought he’d purchased $300,000 of life insurance, and the carrier
asked the employer where the evidence of insurability was. I’ll shortcut to the
answer: to make the deceased widow whole, the employer had to self-fund the
additional $200,000 in life benefits, and the Director of Human Resources lost
his job. A forgotten form from a benefit manager on a voluntary life plan ended
a career and cost this employer $200,000.
If you are reading this and unsure what an evidence of
insurability is, do not offer voluntary benefits. That risk is too significant
for you and your organization at this time. If you are going to provide
voluntary life or disability, make darn sure that your broker explains these
potential nightmares to you.
Compliance Nightmares
Beyond the previous chilling story, a whole other compliance
issue can arise with voluntaries. Suppose there happens to be a legal dispute
between one of your employees and your voluntary vendor. In that case, that
vendor will almost certainly argue that the plan is covered by Employee
Retirement Income Security Act (ERISA) and that the employee’s lawsuit should
be filed against the employer instead of the insurer. If the court agrees, the legal
burden shifts to the employer. And in case you were wondering, yes, this one
also gets HR folks fired. Courts regularly rule that a voluntary plan is an
ERISA plan, even if the employer never intended to sponsor the plan formally.
And if that happens, and the plaintiff’s attorney is worth his salt, they’ll also file claims against the employer for all the ERISA reporting, disclosure, and fiduciary requirements that weren’t followed. Two of those penalties would be:
- $149 per day penalty for failing to provide Plan Document and SPD; and
- $2,097 per plan per day for failing to prepare and file Form 5500.
Furthermore, the legal standard for what mandates that ERISA
covers a plan is not a bright-line test. It is akin to the federal employee vs.
independent contractor standard, if you are familiar with that. It is a “totality of circumstances” test that
requires the plan to:
- be completely voluntary without any employer contributions;
- not allow the employer to endorse or “take credit for” the plan;
- not allow the employer to receive consideration for collecting and remitting premiums;
- not use the employer’s name, or associate the voluntary plan with the employer-sponsored benefit plans;
- not communicate the voluntary benefits at Open Enrollment with all of the employer-sponsored ERISA-covered plans;
- not recommend the plan to employees;
- never say ERISA applies;
- not allow the use of the employer’s cafeteria plan; and
- not assist employees with claims or disputes.
In some cases, judges ruled that employers endorsed plans
because they announced the programs in memos written on company stationery. I’m
reminded of the old Jeff Foxworthy routine, ya might be a redneck ERISA
if …
Failing any of the above bullets might make your plan an ERISA plan, depending on the court’s assessment of the action's severity and/or frequency. Of course, failing to abide by more than one further tips the scale in the direction of ERISA.
Benefit attorneys who litigate these types of cases regularly
report that 80% to 90% of voluntary benefit plans are, in fact, ERISA plans
once litigation commences and the voluntary provider makes this reflexive
initial motion.
And With All of That, There Are Some Places for Them
With all that said, is there ever a time when voluntary
benefits are a good idea? Yes, they can be appropriate and even desirable in a handful
of circumstances.
Voluntary home and/or auto
insurance is often just a link to a carrier that employees can quote
themselves. It is done at any time of the year and regularly gets employees an
additional 5% to 10% off, in addition to any other discounts for which they may
qualify. Employers regularly can and do stay out of these offerings.
Pet Insurance. As
with home and auto, it is typically just a link to a vendor that can and will
offer your employee a modest discount because they work for you. Like with home
and auto, I’ve never seen a pet plan morph into an ERISA plan.
Voluntary Group Life and Disability. These are often no-brainers. Notice that I said group coverage here. I do not like the idea of individual, 1099’d, 100% commissioned enrollers sitting across from your employees and asking them what momma and the baby will do when they die. No, this is the option to buy additional life and disability above and beyond the core employer offering. We communicate it in a group setting, and then treat it like an ERISA plan as it is linked to your underlying life and disability. But know, all my caveats in this piece's “Administrative Hell” section apply. If you don’t have a seasoned, stable, savvy HR staff, you may want to consider holding off on these lines for a bit.
