Alberta to require funding of LTD benefits: A dangerous precedent?

Alberta legislation to secure employees’ long-term disability benefits may have employers reconsidering offering such plans.

Provisions under the province’s new Insurance Act (the Insurance Act, 1999), which could come into effect as early as this fall, will require employers to insure long-term disability (LTD) plans providing benefits for more than two years. Because employers provide LTD benefits at their discretion, any regulatory regime covering LTD plans must strike a delicate balance.

There must be safeguards to ensure that disabled employees receive the benefits they were promised and so desperately need. But regulatory controls must not make the provisions of such plans so onerous and expensive as to cause employers to elect not to provide LTD plans.

As there is no legal requirement for employers to provide group LTD coverage, organizations that cannot afford to provide LTD benefits cost-effectively may elect to terminate coverage.

Although the Alberta government’s intentions may be laudable, the net result of their actions could be to reduce employee protections rather than enhance them.

The legislation is a response to high-profile cases, such as the Eaton’s case, where disabled employees stopped receiving comprehensive LTD benefits from a self-insured plan when the company declared bankruptcy. The Eaton’s case received extensive media coverage, highlighting the risks associated with self-insured LTD benefits.

The Alberta Treasury Department tackled the issue last summer by releasing draft regulations to the province’s new Insurance Act. The changes are intended to provide more security to recipients of LTD benefits paid due to a disability arising from sickness or accident for a period of more than two years. However, the legislation does not recognize the fact that not all self-insured LTD plans are unfunded.

While the government had originally intended that the act and regulations would come into effect this May, the draft regulations did not receive Cabinet approval before the provincial election was called. It is expected the regulations will come into effect in September 2001, and all employers will have until September 2002 to comply.

Also at stake are LTD benefits funded through a health and welfare trust (HWT). (See box.) There is a question as to why HWTs are included in the legislative changes, as a trust already provides fund security and the insurance requirement may have negative tax implications for employers.

The government held limited consultations in the fall of 2000, but many stakeholders did not participate, as they were not aware of the impact of the pending changes. Only those stakeholders who actually made submissions have been, or will be, advised of the final content of the proposed regulatory changes before they are released.

As submissions, and the issues they raise, are not made public, it is virtually impossible for interested parties to ascertain what extent, if any, concerns about the legislation — such as the inclusion of HWTs — have been presented to the government.

Why employers self-insure

Watson Wyatt’s 1997 Staying@Work survey indicated that 12 per cent of survey participants provided self-insured LTD benefits, as opposed to guaranteeing funds through insurers. In many cases, insurers may be providing administrative services only plans (ASO).

Why do employers elect to self-insure? Insurance premiums may be prohibitively expensive for some organizations. In some cases, insurance coverage is simply unavailable — for example, where organizations are involved in a merger or acquisition, a major downsizing, or participation in high-risk industries.

Of course many employers opt not to provide LTD benefits. The size of the organization may make provision of LTD benefits impossible. Eliminating HWTs as a funding mechanism will further restrict options for both individual employers and multi-employer plans.

The provisions of the Insurance Act, 1999 and the draft regulations are intended to apply to any plan insuring Alberta residents, regardless of where the majority of employees are located. For employers also operating in other provinces, insuring LTD benefits for only some of its employees would likely be unwieldy and expensive, and the draft regulations may result in pressure on employers to insure the LTD benefits of all employees.

If an employer chooses only to insure the benefits of Alberta residents, its other employees will likely demand the same protection.

If the regulations are passed as currently envisaged, it may only be a matter of time before other provinces follow Alberta’s lead, despite the potentially troubling possibilities.

Karen DeBortoli is a lawyer with the Canadian Research & Information Centre of Watson Wyatt Worldwide, located in Toronto. She may be contacted at [email protected].

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