© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the May 2006 edition of BENEFITS CANADA magazine.
Fine Print*
*It’s hard to decipher what works in disability management, an area that’s increasingly less defined. But audits and close examinations of plan design and clauses can make the picture a bit clearer.
By Jamie Farrell and Anne Nicoll

Much has been written about disability management(DM)from the insurer or case manager’s perspective. But the burden of managing employee absence has a new perspective when it comes to advising plan sponsors on the full spectrum of needs for the design, delivery, and governance of their disability programs.

DM is about more than just managing premiums. Employers are seeking guidance on a myriad of issues, starting with establishing overall objectives for their disability plans and ensuring that these objectives are met. They’re also looking at changing plan design to meet the needs of their workforce. This includes adopting the right governance structure and using the best processes to manage these cases to influence productivity, employee morale, and program effectiveness.

The disability landscape has changed over the last decade. The nature of claims has moved beyond the “black-andwhite” medical conditions that are easily validated to situations where the reason for disability is not always easily identifiable by a plan sponsor.

The increasing incidence of these subjective claims becomes more challenging when privacy issues come into play. Employers are increasingly less comfortable with assessing disability claims internally and look for thirdparty assistance in managing their short-term disability(STD)claims. Employers should recognize that while they can outsource case management, it is they who retain accountability and responsibility for the overall program— and for their employees.

The first step in this process requires the employer to review their salary continuance plan docuumentation. Does this documentation provide a consistent, comprehensive, and fair set of rules to be applied when an employee is off due to illness or injury? These rules should cover items such as: eligibility; definition of disability; proof of disability requirements; benefit level; elimination period; long-term disability(LTD)plan duration of benefit; offsets; recurrent disabilities; consistency with LTD plan; return to work and rehabilitation planning; exclusions and limitations.

With the establishment of solid rules, the next step is determining how best to administer them. A number of options are available to employers seeking assistance of a third party for the management of their disability claims. The decision of selecting the best provider depends on the employer’s internal resources, the demographics and nature of their workforce, and the degree to which the employer has developed a relationship with existing providers.

Using the LTD provider for this assistance is one option. The rationale behind this is that insurance companies have a vested interest to evaluate claims earlier as a way to reduce the likelihood to LTD claims. They also have resources to manage claims through their insured STD and LTD products, and they offer employers an arm’s-length solution.

Medical service providers, employee assistance providers, workers’ compensation consultants, medical and vocational rehabilitation specialists, and other specialty providers are marketing their expertise in case management services for salary continuation plans. Each of these providers brings their own approach to managing employee disability.

In addition, employers are looking at instituting specific governance practices as well as enlisting the help of outside providers. These practices could include LTD audits, design changes and benefits plan language which can identify problem areas, target poor provider performance and provide a success snapshot.

Challenged with not knowing if their current arrangement is best, plan sponsors are seeing LTD audits as part of their toolkit for identifying their service benchmarks and assessing how their provider is operating. No longer simply intended to catch errors, audits provide the plan sponsor with information on:

  • timeliness and appropriateness of decisions;
  • quality, and frequency of communication with program stakeholders;
  • effective use of appropriate tools(abilities assessments, independent medical information, rehabilitation therapy);
  • appeal protocols, processes, and quality assurance;
  • case management planning approach and follow-up to ensure proactive identification and management of medical and non-medical issues;
  • identification of abilities and limitations and the sharing of this information with the employer to ensure that the employer has the necessary information to fulfill their accommodation obligations;
  • and how well the employer is partnering with the LTD provider in seeking claim resolutions.

Confidential claimant medical information is safeguarded by structuring the sharing of claim information with a third party. At the same time, the employer obtains information beyond premiums and claims paid, claimant information, and therapeutic basis for claims.

With plan audit results, employers are armed with information on service effectiveness, as well as identification of areas of improvement for themselves and the LTD provider. The results allow them to lead the charge in improving the disability program experience for all stakeholders.

The ever changing demographic of the Canadian workforce has required employers to revisit a number of designrelated elements of their disability programs. They include waiting periods, elimination periods, participation, schedules and premium payment.

A number of benefit programs, including LTD, contain waiting periods. These waiting periods can range from zero to six months, depending on the employer or industry. Some group insurance programs have benefit-specific waiting periods(for example, 12 months for dental).

Plan sponsors have been faced with a number of philosophical questions related to these waiting periods, including: should our benefits plan continue to have a waiting period? Should the waiting period be the same for all benefits, including LTD? And, do we have concerns if an employee became disabled during their waiting period and had no access to our group long-term disability program?

Employers, particularly those with low employee turn-over rates, are revisiting the nominal costs of eliminating their waiting periods to align their practice with their philosophy.

All LTD plans contain elimination period provisions. These provisions state that an employee must be absent from work, due to disability, for the duration of the elimination period before LTD benefits begin. It is common for employers to design their STD or salary continuance plans to match the length of the elimination period.

Employers are revisiting the duration of their LTD elimination periods. When an effective program and case manager is in place, the expectation is that most disability claims are effectively managed from the onset. With this, some employers are extending their LTD elimination period. This has a dual effect in allowing the short-term case manager more time to return the employee to work and lowering the risk for the insurance company—leading to lower LTD premiums.

Generally speaking, LTD plans are designed on a mandatory participation basis—that is, coverage is extended to all eligible employees with no opt-out, even if employees are required to pay the full premium cost of the plan.

Employees have been crying foul over the practice of mandatory participation in LTD plans for a number of reasons. The biggest frustration seems to lie with the fact that, while employees are paying premiums for almost half of the LTD plans in Canada (according to Mercer Human Resource Consulting’s Policies and Practices survey), less than 5% of all employees are expected to claim for benefits.

Unwilling or unable to allow employees to opt-out of LTD, employers have responded by addressing the level of coverage mandated for employees. Where the lowest reimbursement schedules used to be no less than 60% of income, plans are now offering schedules as low as 30% to 35% and allowing employees to purchase additional coverage if it suits their needs.

Aside from looking at the amount of mandatory coverage provided to employees, plan sponsors are also reviewing the efficiency of the reimbursement schedules associated with their non-taxable plans.

In accordance with Canadian Revenue Agency tax laws, employees paying 100% of LTD premiums are eligible to receive benefits on a tax-free basis. Employees on LTD would see these benefits taxed as income if their employer subsidized the premium.

Although the schedules between taxable(employerpaid)and non-taxable(employee-paid)plans may differ, plan sponsors try to achieve similar take-home income under the two arrangements.

A challenge lies with those non-taxable, employee-paid LTD plans where the reimbursement schedule is a flat percentage of earnings. These schedules are subject to erosion by the all-source maximum—a provision of many plans dictating that disability income from all sources can not exceed a percentage of pre-disability earnings. The most common allsource threshold is 85% of net income. The intent of the allsource maximum provision is to provide a financial incentive for disabled employees to return to work. The concept of erosion exists where the disability benefit, calculated as a percentage of employee income, exceeds the all-source maximum. In these instances, LTD benefits would be calculated according to the all-source maximum provision.

For a non-taxable LTD plan with a reimbursement schedule of 662/3% of monthly income, for example, an employee earning $60,000 per year would have paid premium based on an assumed annual benefit of $40,002 but could never actually receive that amount as it would be reduced to no more than $37,488 by the insurer. As salary increases, so too does the erosion impact of the all-source maximum.

Employers are addressing this erosion with graded LTD schedules. A graded, non-taxable LTD schedule will result in disability income similar to that of the all-source maximum— preventing erosion, and ensuring the premium paid through an employee’s working life reasonably reflects the benefit received.

In light of the tax rules noted above, where taxation of benefit payments under LTD plans is related to the source of premium, employers have started to review their current premium payment structures. There is no right answer to the question of whether it is better for the employee or the employer(or both)to fund LTD premiums. There are a number of issues to be considered, including:

  • The plan sponsor’s budget philosophy relative to group insurance premiums and where the LTD benefit fits in relation to other benefits;
  • Employers may have strong opinions on the tax effectiveness of employee premiums. For example, using employer monies for LTD premiums and employee monies for Life benefits would reduce the taxable benefit implications;
  • Plan sponsors with non-taxable LTD plans have had challenges with fairness and equity in light of recent substantial rate increases. Tax regulations prohibit them from offsetting significant rate increases without impacting the tax status of the plan and as such, employers have felt it unfair to subject employees to these increases without the ability to offer assistance.

For some time, employers have felt that since the insurance company assumed the risk, it dictated the terms. In recent years, plan sponsors have become more engaged in dictating important elements of their LTD contracts. Elements that come to mind include:

Pre-existing condition clauses: Years ago, these clauses were in almost every LTD contract. With the growing trend of job portability, the possibility exists that those clauses could be challenged as discriminatory in court in the future.

Offsets: The Hennig vs. Clarica Life decision raised awareness around the legality of offsetting dependant CPP benefits across the country. More recently, insurers have taken stronger positions in defining the terms of both offsets and income relative to disability benefits.

Cost-of-living adjustments: These provisions allow employees to choose, sometimes subject to medical underwriting, whether their future LTD income will be indexed.

Accommodation: Human rights legislation is forcing employees to be more diligent with their accommodation of disabled employees and reinforces the need for plan sponsors to review their policies and clearly document their accommodation approach to avoid any legal liability.

Termination: There have been a number of court challenges, and increasing attention paid, to the issues of employee termination while on LTD. In March 2006, the Ontario Court of Appeal ruled that a terminated employee retains the right to disability benefits beyond the statutory notice period to the end of the common law notice period.

As with premium payment and accommodation issues, there is no one approach to issues of member/benefit termination. Clear and concise communication—outlining the policies and their conditions—is paramount.

Mandatory Retirement: Employers, most recently in Ontario, are continuing to review the implications of governing provincial(or federal)employment legislation on their eligibility and age-specific termination provisions. While changes to insurer plans regarding the termination of LTD coverage and benefits at age 65 are not anticipated, the ending of mandatory retirement in Ontario may force employers to review some internal policies around performance management and benefit eligibility.

Integration of the management of disability programs is forefront in the minds of many HR leaders. They are mindful that these programs are intimately related to the full-spectrum of employee programs in place. In considering the direction that a program should take, plan sponsors are looking at the bigger picture to implement the most change with the best outcome.

Jamie Farrell is a senior associate with Mercer Human Resource Consulting in Toronto. jamie.farrell@mercer.com. Anne Nicoll is a principal with Mercer Human Resource Consulting in Toronto. anne.nicoll@mercer.com