Protecting employees from catastrophic financial hardship is a key motivator for most employers when it comes to the design of their employee benefits plan. The life insurance benefits that provide families with financial support in the event of an untimely passing and the drug plans that remove financial barriers so employees can purchase expensive, life-sustaining drugs get fair recognition as important components of most benefits plans. But what about long-term disability (LTD) coverage?

Whenever an employee is prevented from working (for any amount of time) due to disability, LTD benefits are there to protect arguably their most valuable asset—their ability to earn a living, support their family, and manage ongoing living expenses. Including the expenses that may be essential to their recovery.

This article discusses key LTD plan design considerations that should be reviewed regularly by employers.

A Word On Taxation

LTD premium can be paid by employees or their employer. Who pays your plan’s premium plays a pivotal role in plan design because employer-paid plans result in LTD benefits being paid out as taxable income, while employee-paid plans result in non-taxable benefits being paid (premiums were paid with employee after-tax income).

When striving to minimize the gap between net take home pay and LTD benefits, employers need to be mindful of how benefit schedules and plan maximums will affect the benefits of their employees in taxable and non-taxable plans.

Taxable plans will need to replace a higher percentage of income to account for taxes. Also, plan maximums need to be higher than non-taxable plans in order to replace comparable incomes.

Navigating Plan Maximums

LTD plans have a variety of maximums built into their contract wording. You’ll find this information in your benefits booklet or in your plan’s schedule of benefits.

The overall maximum, as the name suggests, represents the maximum benefit available through the plan. This maximum isn’t calculated net of tax, so you need to consider that the net after-tax benefit will be lower than advertised.

The non-evidence maximum (or non-evidence limit) is the maximum amount of coverage an employee can obtain before they’re required to submit evidence of insurability—a health questionnaire. The non-evidence maximum is typically lower than the overall maximum.

From an Insurance company’s perspective, the non-evidence maximum is necessary to control risk, allowing them to decline coverage to individuals with pre-existing health concerns. Low non-evidence maximums can have the undesired effect of discriminating against individuals who need LTD coverage the most.

As organizations grow and demographics change, your LTD plan may become eligible for revised plan maximums. It’s recommended that you perform an audit of your plan regularly to identify whether underinsurance exists and if changes are warranted. Your advisor can help.

Plan Member Communication

As far as benefits are concerned, most employees’ focus is typically concentrated on what’s offered through their extended health and dental coverage. This isn’t surprising considering the usage these benefits garner over the course of a year and the reality that most people simply can’t relate to what living with a disability would be like. One’s only faced with the question of how they’ll be able to make ends meet when the unexpected happens.

With the financial instability of the pandemic fresh in most people’s minds and knowing that the cost of living triggers a lot of financial stress for most Canadians, it would make sense for employees to invest time in better understanding their income replacement options should they ever be prevented from working due to an accident or sickness.

Our recommendation: review LTD benefits with your employees during pay reviews and whenever a major life change takes place that would impact their benefits coverage. Provide them with a summary of their earnings and scheduled LTD benefits. This could also be a great opportunity to provide them with a total compensation statement summarizing the value of employer contributions towards their benefits programs.

During the LTD review, be sure to identify gaps in coverage and provide them with all the forms they need to apply for coverage in excess of the non-evidence maximum (if applicable). If, after careful consideration, the employee decides not to pursue this option, at least they’ve been provided with all the information they need to make an informed decision, and you have documentation acknowledging their decision.

Wrapping Things Up

LTD plans have a lot of moving parts. Key stakeholders need to consider how the plan accommodates the varying income levels found within their organization and take on an active role in continually evaluating its effectiveness. An experienced advisor will have the tools needed to properly audit plans and provide direction with respect to whether it’s designed to provide employees with the financial support they’ll surely need in the event they’re prevented from being able to work.

Jaime is an associate at Montridge Advisory Group. He specializes in group benefit solutions. Jaime is committed to providing his clients with the tools and resources they need to build and maintain an affordable, forward-looking benefits strategy that aligns with their values and desired outcomes as they pertain to their employees emotional, physical, and financial well-being.  

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