Disability Income Insurance Series – Part 1

Reverse Discrimination – The Gap

If you ask most people about their company health insurance, they can tell you all the ins and outs of the group health plan. They know their deductible, they know their co-pay, and they know that they met their deductible last year because their kid broke an ankle playing soccer. People understand how their health insurance works.

People understand 401(k). They understand that they are putting in a certain percentage every month, and in some cases they might get a 3-5% employer match of those contributions. They understand what type of funds they are putting their money into, whether it is company stock, or a menu of different mutual funds from which they can choose to invest their money. They know that a few years ago, 401(k) was down but now with the market doing well, it’s up again.

If you ask people, especially highly compensated employees, about their group disability plan at work, most of them shake their heads and say “I’m good, I’m set, I have it.” But they don’t really understand how their group Long Term Disability (LTD) Plan works in the same way that they understand their group health and 401(k).

Reverse Discrimination

For highly compensated employees, this leads to an issue called reverse discrimination. Most group LTD Plans have a monthly cap on how much benefit they will pay out if the employee becomes disabled. That cap is typically $5,000 – $10,000. If the firm is based in downtown Manhattan, typically the cap is $15,000-$20,000 per month in coverage. So while an employee might look at that and say, “Okay, I make $200,000 a year. I’ve got a group LTD cap of $20,000 a month. If I become disabled, I’m fully covered.” What they don’t know and don’t realize is that if the plan is employer-paid, the employer is paying for the premium so the benefit becomes taxable. That means the percentage of income they thought they would be getting replaced is actually a lot less.

A lot of group LTD plans do not cover any type of bonus or incentive compensation. So if you take that same person who’s making $200,000 with a base salary of only $50,000 and a bonus of $150,000, if that person were to become disabled, their group LTD benefit would be calculated on only $50,000 of income instead of the full $200,000. This leads to reverse discrimination where all the rest of the employees who just have a base salary without incentive compensation are covered at typically 60% of their full income amount. You’ve got your highly compensated employees that are not getting the same 60% income replacement that everybody else is.

Most HR people don’t understand how the reverse discrimination feature works. Their top people, executives, CEO’s, CFO’s, probably even the head of HR, are being reversely discriminated against by their group LTD Plan because it does not adequately cover the same type of income and the same amount of income as everybody else.

One of the ways that we can solve that problem or address that disability gap is through individual disability insurance. An individual disability insurance policy covers any type of salary, including bonus income, incentive income, and commission income. We use the individual disability policy to help close that gap and bring the highly compensated executives back up to the same level of income replacement should they become too sick or hurt to work, that all the rest of the other employees receive.

There are a few different ways we can go about implementing different types of individual disability plans at the work site. If we get three or more people from the same company, and we get the company to endorse that, we can actually start to include discounts on those individual policies. Depending on the demographics of the group, there may be an opportunity to implement individual coverage on a guarantee issue basis, which means discounted policy, with very minimal underwriting that’s involved. We’ve positioned the guaranteed issue solution to help offset the reverse discrimination for some of the small to medium and even larger size corporations and businesses that we work with where there were concerns within the group.