Friday, December 16, 2011

California’s Road to Ruin | The Economist

Golden State’s ability to sustain Medicaid and private health insurance will rely largely on its ability to tame its budget woes. 

California is now widely studied as an example of what to avoid.  (Note that this is a particularly alarming statement coming from a European media outlet.) Why is the home of Apple and Google so useless when it comes to running school districts or budgeting, and why have so many clever people settled for such a bad deal?

  • A messy structure of government. Look at an administrative map of California and you might assume that a child had scrawled over the design. It is a muddle of thousands of overlapping counties, cities and districts. Beverly Hills and West Hollywood sit in the middle of Los Angeles but are separate cities. The LA school district has 687,000 pupils, but there are 23 others with 20 pupils or fewer. Often voters have little idea what their officials do for their money. Last year the residents of Bell, a poor Latino city of 38,000 people, found their city manager was paid $788,000 and their police chief $457,000 a year.
  • Ever more taxes. A study last year by the Pacific Research Institute said California had the fourth-largest government of all American states, with state and local spending equal to 18.3% of its gross state product. Texas, a state with which California is often compared, chewed up just 12.1% of GSP. It also looked at tax structures, and on that count California came 45th out of 50 states, with its steep income tax being especially damaging. Its tax system has been a mess ever since the dotcom boom when it relied too heavily on capital-gains taxes. As taxpayers have got crosser, the state has tried to tax them as sneakily as possible while adding tax breaks for favored lobbies.
  • And more rules: The broader problem is the growing thicket of regulation—of which taxes are merely the most onerous part. Many of the new laws that have been passed in both Europe and America have admirable aims: better health care, cleaner air, less discrimination against minorities. But as Philip Howard of Common Good points out, they are amazingly cumbersome—Mr Obama’s health bill was over 2,000 pages long—and once on the statute book, they seldom come off again. One solution is to follow Texas’s example and let legislatures meet only occasionally. Another would be to introduce sunset clauses so that all regulations automatically expire after a while.
  • Towards the older middle. Given the fury from the left about bankers and from the right about welfare spongers, you would expect all that extra government spending to have been swallowed by either end of the income spectrum. In fact in California, as in most of the West, the cash has flowed mostly towards those with middle incomes and the old.  Both the rich and the poor do relatively badly out of government.
  • The rich pay for most of it. In California the top 1% by income accounted for 43% of income-tax revenues in 2008 and the top 5% paid 64%. In America as a whole the top 1% paid 38% of federal income taxes and the top 5% paid 58%; their respective shares of national income were 20% and 38%. The wealthy pay the lion’s share in most European countries too. Getting the rich to cough up so much might be a desirable social goal in a time of great inequality, but it is hard to claim that they are not paying their share.

Californians are still determined to get something for nothing. (See graph below.) “People here are addicted to improving their lifestyle. They want more and more from their government.”

Is there a better way? Many of those who used to see the future in the Golden State now prefer to look across the Pacific—towards emerging Asia.

Source: The Economist, Print Edition, Mar. 17, 2011. Full text:


Friday, November 18, 2011

Don't Let Your Voluntary Benefits Program Become an ERISA Plan as Most Employers Have

This is from Kevin M. Ohara at Life Health Pro:

To their surprise and dismay, some employers have learned that their voluntary benefit programs are ERISA programs, subject to all of the same requirements and liabilities as their traditional benefit plans of the Employee Retirement Income Security Act.

Despite assurances from carriers that such programs are not subject to ERISA, mistakes made by the employer in the design and administration of the plans may cause the programs to fall under the ERISA umbrella. Should that occur, the noncompliance penalties and obligations can be quite severe. It need hardly be said, too, that the customer relationship the agent or broker has built with the hapless employer would be in tatters.

By being aware of the rules under ERISA, and through proper planning, agents and brokers of voluntary worksite benefits can help guide their employers around potential exposures.

Truly voluntary plans--that is, those fully paid by the employee without contributions from the employer--are by definition ERISA-exempt under the Act's "safe harbor" provisions. But the U.S. Dept. of Labor has recently stepped up efforts to uncover programs that, due to an employer's mishandling, fail to qualify for that exemption.

Some employers only become aware that their voluntary benefit plans have become ERISA-eligible when they receive an inquiry from the DOL. More often, the situation comes to light when a voluntary benefit carrier, having been challenged over a claims-payment issue, seeks to invoke ERISA protection to avoid a state insurance department investigation, along with the possibility of penalties or a large jury award. Either way, the employer is generally caught unaware and must scramble to meet its newly discovered obligations.

Most benefit programs that make the shift into the ERISA category do so because the employer has stepped over a legally defined line and becomes too closely involved with the plan.

To avoid ERISA liability, the plan sponsor must have minimal interaction with the program. Other than offering the plan, collecting premiums and remitting those premiums to the carrier, the employer must avoid any direct intervention with the voluntary benefit program whatsoever.

In an effort to be helpful to its employees, the plan sponsor may cross the line and risk exposure. Even the level of enthusiasm the employer shows in promoting the plan will be considered in the DOL's assessment of whether ERISA applies.

Some behaviors that could jeopardize the safe harbor status of voluntary benefits include:

    • Employer contributions to the plan costs, even relatively insignificant ones.
    • Employer's staff intervention on behalf of an employee in day-to-day carrier dealings.
    • Tying participation in the voluntary plan to eligibility for other benefits.
    • Listing the voluntary plans alongside traditional ERISA programs in companywide communication materials.
    • Placing the employer's logo on a voluntary product carrier's marketing materials.
    • Publicly taking credit for introducing the benefit.
    • Company managers and supervisors actively recommending voluntary benefits to rank-and-file employees.

A particularly difficult situation arises when deciding whether to include the plan in the employer's cafeteria program. By commingling the voluntary plans with the basic health programs within the Section 125 plan, the employer is at risk of tacitly promoting the plan. In addition, since including the program in communication materials about the cafeteria plan may imply the plan's similarity to other, ERISA-qualified benefits, a case could be made that the employer misled employees about the plan's status.

If, despite the sponsor's best efforts, a voluntary program has been determined to be an ERISA program, all of the standard requirements would apply. These include triggering obligations to file 5500 Forms, develop plan documents and summary plan descriptions, include HIPAA-COBRA and other required language where appropriate, and follow nondiscrimination rules. Even increased obligations under the Family and Medical Leave Act and the Uniformed Services Employment and Reemployment Rights Act of 1994 may be triggered.

Producers selling voluntary benefits can help employers steer clear of such possibilities by making sure the producer or an outside administrator, not the employer, handles one-on-one sales and enrollment for the benefits. Except for the truly financial aspects of these plans (e.g., premium collection via standard payroll processes), all communications about the plan must take place directly between the employee and the carrier or its representatives.

The availability of voluntary programs has proven to be a boon to employees, providing a range of benefits at a cost unavailable in the individual market. But in an employer's exuberance to provide these expanded opportunities to their staff, there is a danger that the "Law of Unintended Consequences" may drag it into a regulatory morass. To maintain the plan's ERISA exemption, help keep your employer clients aware of the need to remain at arm's length from these benefits.

Thursday, November 3, 2011

Watch Out for Liabilities with Voluntary Benefits

This is from Ilan Mochari writing for CFO Magazine (link):

... What's fueling the growth [in voluntary benefits]? "Health-care costs are eating away at profits, and not only are employees being asked to pay more, but often their pay is frozen or increases are minimal," observes Leonard Sanicola, senior practice leader at WorldatWork, a nonprofit association based in Scottsdale, Arizona, that focuses on compensation and benefits. "Voluntary benefits allow companies to offer something in return at a time when economic and business conditions are challenging." Undoubtedly, insurers have picked up on the trend; AFLAC, for example, has built its whole business on selling insurance through employers.

Thrown A Bone 

... Indeed, offering a choice of vendors is crucial for avoiding the major potential pitfall of voluntary plans: the risk that a vendor problem will trigger an employee lawsuit against the employer. [And note that virtually no employer actually offers a choice.] A choice underscores the point that the employees, not the employer, are responsible for vetting and selecting vendors. According to attorney Richard Menson, a partner at McGuire Woods LLP in Chicago, a company should explain that its affiliation with a vendor does not constitute an endorsement. "I would be clear to employees that they are on their own as participants, and that the plans are not subject to the Employee Retirement Income Security Act," he says. Menson adds that he hasn't seen any ERISA suits over voluntary benefits go to court—because corporations are prudent about how they communicate voluntary benefits, and because most cases with merit are settled before trial. As an added safeguard, most insurance vendors provide employers with indemnification clauses that hold corporations harmless in case of any trouble.

But the fact that legal liabilities are relatively easy to avoid doesn't mean an employer can choose vendor alliances carelessly. A mediocre vendor reflects poorly on the corporation and damages any goodwill earned from offering the voluntary benefit in the first place. "There's still a great responsibility for the company to screen its vendors," observes Pete Fornal, president of HR Consultants, based in East Greenwich, Rhode Island. "If your employees' customer-service experience is not good, you need to change providers."

Talk Is Not Cheap 

One key mistake employers make is not in how they choose the voluntary benefits to offer, but in how they communicate those benefits to their workers. "Employers think that the only time they need to communicate is during annual enrollment," says Herbster. "They communicate it once and then forget about it." She advises employers to have a link that describes benefits—and allows for registration—on a Web page that workers access frequently.

Another way to communicate, points out Aon's Sullivan, is to hire an enrollment company. Enrollment companies—such as Worksite Communications in Tallahassee, Florida, and Ward Services in Columbia, South Carolina—specialize in getting employees to sign up for programs through one-on-one meetings and telephone- and Web-based services. "You can't just jump in and do 10 voluntary benefits overnight," warns Sullivan. "Talk about 2 or 3 at first."

Above all else, experts encourage employers to be honest in their communications—even if that means admitting that the voluntary benefits are as much about saving corporate dollars as they are about pleasing pet lovers.

But the process of vetting vendors and communicating with employees takes time, which is why not every company offers voluntary benefits. "It takes effort to communicate about the benefits, sign everyone up, and process the paperwork through the payroll system," says Fornal. That effort, however, may pay off in better employee morale—no small thing these days, when workers are forced to dig ever deeper into their wallets.

Ilan Mochari is a freelance writer based in Cambridge, Massachusetts.

Saturday, September 3, 2011

The Doubt of the Benefit: Why Voluntary Benefits Are Not Win-Win

Voluntary benefits may seem like a win-win. Here's why they could be a lose-lose. 

This is John Goff, writing at CFO Magazine

Corporate benefits packages may be shrinking, but voluntary benefits are skyrocketing. According to a recent survey, 6 of every 10 companies now offer at least one voluntary, or supplemental, benefit. Employees buy such products—most often some form of life, health, disability, or dental insurance—directly from vendors, usually through a payroll deduction. It's easy to see the appeal of voluntary benefits: they cost employers next to nothing, yet boost employee morale.

But voluntary benefits are not necessarily a win-win—in fact, they could be just the opposite. Consider the case of UnumProvident Corp., the nation's largest disability insurer. In 2003, voluntary offerings represented about 40 percent of Unum's U.S. brokerage sales. Over the past year, however, policyholders have accused the self-described "leader in income protection" of systematically denying disability claims.

Management at Unum, which recorded a net loss of $386.4 million in 2003, has denied the charges. But regulators in 45 states are conducting a joint market-conduct exam of Unum's handling of claims—the largest such review in U.S. history. That probe is likely to be completed sometime this summer.

Such problems with a vendor can turn into a morale-buster for employees, and a headache for their employers.

Worse, insult may be added to injury if employees who bought a product believe their employers endorsed the vendor in question. In practice, few companies stand by supplemental plans, because doing so makes it more likely that a program will fall under the purview of the Employee Retirement Income Security Act (ERISA)—which substantially raises a plan sponsor's reporting, disclosure, and fiduciary responsibilities. Warren Steele, senior vice president of marketing at insurer AFLAC, believes that less than 10 percent of the company's corporate clients treat voluntary programs as ERISA plans. (An official at AFLAC notes, however, that Mr. Steele does not know the exact percentage.)

Critics claim that it's in the vendor's interest for the sponsoring company to back its products—and not just to boost sales. Attorneys point out that, generally, ERISA favors insurers over employees in policy disputes. ERISA preempts some state law, which can mean cases are heard by judges, not juries—a huge plus for defendants. More important, ERISA prohibits workers from suing insurers for punitive damages.

In fact, when sued by a policyholder, an insurer's first move is usually to try to convince a judge to rule that a supplemental plan is an employee welfare benefit plan (and hence subject to ERISA). Such a ruling could be bad news for an employer, which can suddenly find itself running afoul of Department of Labor (DoL) regulations. As for policyholders, the inability to sue for punitive damages may make it difficult to find an attorney to take a case. "This is a disaster for employees," declares Joseph Belth, professor emeritus of insurance at Indiana University. "They're being taken to the cleaners."

Message: We Care 

None of this is cheery stuff for companies with voluntary benefit programs. And that's getting to be a long list. According to Avon, Connecticut-based advisory firm Eastbridge Consulting Group, which conducted the survey cited above, sales of supplemental worksite insurance topped $4 billion in 2002, double the amount sold just five years earlier.

Scores of insurers offer such plans, including AFLAC, Unum, Liberty Mutual, AIG, Wachovia, and MetLife. Joe Foley, senior vice president of market development and communications at Unum, says that sales of the company's voluntary benefits have been increasing at nearly a 35 percent clip in the past several years. Notes Foley: "Voluntary has been our fastest-growing segment."

While critics charge that businesses launch voluntary benefit plans to camouflage cutbacks in their own company-funded programs, by and large the programs appear to be well intentioned. Even Mark DeBofsky, a partner and plaintiffs' attorney at Chicago law firm Daley, DeBofsky & Bryant, grants, "The employers' motives are usually good."

Telecommunications company Verizon Inc., for instance, maintains a program called Verizon Advantage. Through the plan, employees have access to group rates on automobile and homeowners' insurance. "Some employees can save oodles of money," says Sheila Small, an assistant treasurer for risk management and insurance who runs the program.

Voluntary programs also help promote the message that a company cares about its workers. Standard Register, a document-management company in Dayton, lets insurance vendors sell a wide array of financial products to employees. According to Richard Mayer, the total-rewards manager of the company, the program reinforces the idea that "Standard Register is a great place to work." Among the company's current voluntary offerings: auto insurance; homeowners' coverage; and extra long-term disability, life, and accidental-death insurance.

A Fine Line 

Companies can run into trouble when they try to claim too much credit for these packages. Managers looking to steer clear of ERISA cannot endorse a voluntary plan. The difference between simply announcing a plan and endorsing it "can be a fine line," acknowledges AFLAC's Steele.

Some critics claim that vendors are only too happy when corporate customers unwittingly cross that line. Notes Jim Gehring, an attorney in the Chicago office of Seyfarth Shaw: "It works to a vendor's advantage for it to look like a plan is endorsed." Offering policies from several vendors can help set employees straight, experts advise. But some insurers say they're not wild about dealing with businesses that plan to present products from many providers. "We don't like to offer our plans with other vendors," admits Steele. "Employees could get confused about which one they bought."

Some say employees are already confused about what they've bought, convinced that their employers endorse the insurance. Says Carl Metzger, a partner at law firm Testa Hurwitz & Thibeault: "To some extent, these plans could be viewed as a bait-and-switch."

Observers point out that seemingly innocuous acts by an employer can be construed by workers—or the courts—as a company endorsement (see "You Might Be ERISA If..." at the end of this article). In several cases, judges ruled that employers endorsed plans because they announced the programs in memos written on company stationery. Interceding in a dispute between a vendor and an employee could also transform a voluntary program into an employee welfare benefit plan. In general, according to the DoL, the more involved a company gets with an insurer's plan, the more likely it is that the employer will be seen as having endorsed the program.

If a voluntary benefit plan is deemed to be an employee welfare benefit plan, a company can end up with a long list of DoL violations, resulting in fines and penalties. Attorneys warn that employers could also wind up on the hook if a vendor goes out of business (four life and health carriers failed in 2003). In that event, directors and officers could find themselves making good on their insurer's policies. According to Testa's Metz-ger, D&O insurance policies at public companies typically do not cover these sorts of suits.

Worse, some observers believe it's only a matter of time before a plaintiff's attorney challenges the DoL ruling that an employer endorsement triggers ERISA protection. If an employer does not meet all the safe-harbor conditions, that does not automatically mean a court would find that the employer established an ERISA plan. Rather, although the safe harbor may not apply, a court could still find that the employer's conduct did not constitute sufficient involvement with the insurer's voluntary benefit plan to make it an employer-sponsored employee benefit plan under ERISA.

If that happens, it would be open season on companies that provide voluntary benefits to workers. Lacking ERISA protection, employers could be taken to court in some circumstances for punitive damages—in jury trials, no less.

Easy Access 

If it's difficult for corporates to determine if a supplemental benefit is bound by ERISA, it's easy to see why vendors are bound and determined to sell the plans.

Take industry leader AFLAC, which began selling cancer insurance in 1964, mostly to small businesses. In 2001, the company convinced management at not-so-small business Wal-Mart to offer voluntary insurance to its workers. To date, says Wal-Mart spokesperson Christi Gallagher, the takeup rate by the retailer's associates has ranged between 5 and 10 percent.

Hardly a stampede. But do the ciphering and you realize that Columbus, Georgia-based AFLAC has sold close to 100,000 policies down at the Wal-Mart. And experts note that with time, employee participation in voluntary benefit plans can rise as high as 25 percent. "[These programs] are great for vendors," says Susan Nash, a partner and employee-benefits expert at law firm McDermott Will & Emery. "They have easy access to employees."

On the whole, employees seem to like being accessed, too. A 2003 survey of workers conducted by NFO World Group for MetLife found that 49 percent of respondents would like their employers to offer a wider array of voluntary benefits. Still, it's doubtful many employees examine the financial health of a vendor when they purchase a supplemental-insurance policy.

Moreover, some critics claim insurers are more inclined to dispute claims made on group policies purchased at work than those bought by customers on their own. Says Indiana University's Belth: "It's quite clear that an insurer is more likely to deny a claim if it's ERISA than if it's not under ERISA."

Few workers know this. Neither are they aware that if they sue, and their policy is deemed to fall under ERISA, the odds are stacked in favor of the insurers. That fact has apparently not been lost on some insurance-company executives, however. In a memo sent out in 1995, a manager at Provident Cos. (which later merged with Unum Corp.) identified 12 claim situations in which the insurer had settled for $7.8 million in the aggregate. If these 12 cases had been covered by ERISA, the memo noted, Provident's total liability would have been no more than $500,000. Concluded the manager: "The advantages of ERISA coverage in litigious situations are enormous."

This is not what the bill's creators had in mind back in 1974. "ERISA was supposed to be for the protection of participants," says Belth, glumly. "Now, it's being turned absolutely on its head."

Employers that don't give sufficient thought to their voluntary benefit plans could find themselves in an equally awkward position. Eager to help workers, they could wind up on the receiving end of an employee lawsuit. Says Metzger: "Voluntary benefit plans often come under the heading of 'No Good Deed Goes Unpunished.'"

John Goff is technology editor of CFO. Additional reporting was provided by deputy editor David Katz.

You Might Be ERISA If...

Attorneys say seemingly harmless acts by a company can elevate a voluntary benefit plan into an employee welfare benefit plan. Here's what to avoid.

    1. Only one vendor. Insurers may want only their products on offer, but the more vendors there are, the less likely workers will think their employer vetted the seller.
    2. Plan announcement on letterhead. Says one attorney: "Some courts have deemed that the mere description of a plan on company letterhead makes it ERISA."
    3. Enthusiastic annoucement. An employer's over-the-top message to workers about a plan may be seen as an endorsement.
    4. No disclaimer. Attorneys disagree on this one, but it can't hurt to put out a disclaimer on all messages to employees about a supplemental plan.
    5. Plan mentioned in other literature. Including information about a voluntary plan in a brochure that also describes a company's ERISA plans could lead to trouble.
    6. Negotiating for a better deal. Trying to get vendors to include more workers in the program, for example, gets an employer more involved in the plan—and closer to ERISA.
    7. Advertising in a dispute. Employers should avoid interceding in a dispute between a vendor and an employee: Explains one lawyer: "That's something a plan administrator would do."
    8. Scheduling the same election period. The open-enrollment period for a voluntary plan should never coincide with the enrollment period for a company's ERISA programs. —J.G.