Group Insurance

What an employer plan is, and what it is not

A group plan is a contract between an insurer and an employer. The employee is not the owner of it. The employee is a plan member, covered under the contract of somebody else, on terms the employer chose and can change. That single sentence explains almost every unpleasant surprise people meet in this subject.

Pricing works differently from an individual policy as well. An insurer underwrites the group rather than the person, which is why an employee with a health history that would make individual coverage expensive, or impossible, is covered anyway from the first day of eligibility. That is the genuine strength of a group plan, and for some households it is the only life and disability coverage they will ever qualify for.

The weakness is the other side of the same coin. Coverage priced on a group and owned by an employer ends when the relationship with the employer ends, on a date the contract sets rather than one the employee chooses. It can also be reduced, changed or cancelled at renewal, and no plan member gets a vote. Nothing about that is improper. It is what the arrangement is.

So the accurate description is a floor rather than a plan. It covers the ordinary, it covers everyone, it costs the employee little, and it is conditional on employment. The comparison with individual coverage works that through.

What usually sits inside a plan

Most plans are assembled from the same parts. Basic life insurance, usually a multiple of salary. Dependent life, a small amount on a spouse and children. Accidental death and dismemberment, which pays only for losses meeting the contract definition of an accident and is no substitute for life insurance. Short term disability, which replaces part of income for a limited number of weeks. Long term disability, which takes over after it and is the most valuable coverage many employees hold without knowing it.

Then the health side: prescription drugs, paramedical services such as physiotherapy and psychology, vision, medical equipment, and out of country emergency coverage. Dental sits beside it, usually split into preventive, basic, major and orthodontic categories, each with its own limits. The overview article goes through them one at a time.

Some plans add critical illness, which pays a lump sum on the diagnosis of a listed condition that meets the contract definition and survives the required waiting period. Many add an employee assistance program, a confidential short term counselling and referral service used far less than it could be, largely because employees do not believe it is confidential.

One thing often bundled into the phrase group benefits is not insurance at all: the retirement arrangement. A group registered retirement savings plan, a deferred profit sharing plan and a registered pension plan are three different things with different rules about what locks in and who controls it, compared in their own article.

The definitions that decide whether a claim is paid

Group insurance is not decided by what a benefit is called. It is decided by the definitions in the contract, and one matters more than all the others together: the definition of disability.

Most long term disability contracts pay, for an initial period, if the member cannot perform the essential duties of their own occupation. After that period the test changes, and the member must be unable to perform any occupation for which they are reasonably qualified by education, training or experience. The change is written into the contract from the beginning and arrives with no announcement. A claim clearly payable in the first stretch can be reassessed and declined at the switch, and that is where most disputes happen. The disability article takes the two definitions apart.

Three other clauses do quiet work. The elimination period is the number of days a member must be disabled before any benefit begins, which sets how much savings a household needs to survive the gap. Offsets reduce the benefit by other income received, including disability benefits from the Canada Pension Plan or the Quebec Pension Plan and amounts from a workers compensation board, which is why the headline replacement level overstates what arrives. A pre existing condition clause can exclude a condition treated in the months before coverage began.

Critical illness contracts run on the same principle. The listed conditions are defined precisely, a diagnosis that does not meet the definition does not pay however serious it is, and there is a survival period. The article on critical illness sets that out.

Who pays the premium decides who pays the tax

This is the piece of knowledge here most likely to be worth real money to a reader, and it is almost never explained at enrolment.

On disability coverage, if the employer pays the premium, any benefit later received is taxable income in the hands of the employee. If the employee pays the premium with after tax dollars, the benefit is generally received free of tax. The difference in what reaches a household during a long illness is substantial, because a benefit is calculated on a proportion of income before that treatment is applied. Where a plan lets employees pay their own disability premium, taking it is usually the reason this paragraph exists.

Other benefits follow their own rules. Employer paid life insurance premiums are a taxable benefit to the employee, while the death benefit itself is received free of tax. Employer paid health and dental premiums are generally not a taxable benefit federally, with Quebec applying a different treatment for provincial purposes. The taxation article goes through each line. None of it is tax advice, the rules change, and any particular arrangement should be confirmed with a qualified tax professional and against the published positions of the Canada Revenue Agency and Revenu Quebec.

Eligibility, waiting periods and the late applicant

Coverage does not begin on the first day of work. A plan defines who is eligible, commonly permanent employees working a minimum number of hours each week, then applies a waiting period before an eligible employee is actually covered. A household that assumes it is protected during those first months is exposed for exactly as long as the waiting period runs.

Enrolment has a window as well. Sign up within it and the basic coverage is issued with no health questions, which is the whole point of a group plan. Miss it and the employee becomes a late applicant, at which point the insurer can require evidence of insurability and can decline. People most often miss the window because the plan of a spouse already covers them, and then the spouse changes jobs.

Optional coverage behaves differently from basic coverage even for somebody who enrols on time. Additional life insurance above the amount issued automatically, and optional coverage on a spouse, generally require evidence of insurability from the outset. The article on waiting periods and enrolment sets out the sequence.

When the job ends, and the window that opens with it

On the termination date set by the contract, coverage stops. Not at the end of the month in every plan, not when the last pay arrives, and not when the employee gets around to reading the booklet. Claims incurred after that date are not payable, and a disability beginning after it is not covered.

A conversion privilege usually exists on the group life insurance. It allows a departing member to convert to an individual policy with the same insurer without answering a single health question, and the window is short, often about a month, and closes without a reminder. For somebody whose health has changed since they were hired, that window may be the last opportunity to obtain life insurance on any terms. The policy available is limited in type and amount and priced at attained age, so it is rarely cheap and it is sometimes priceless.

Long term disability generally does not convert, and neither do health and dental, though many insurers offer an individual replacement plan if application is made quickly. Ask for every conversion deadline in writing on the day notice is given or received.

The structural conclusion is uncomfortable. A household whose only life and disability coverage comes through an employer is one job change, one restructuring or one illness away from having none, and the health that would let them replace it is exactly what may have changed meanwhile. Owning a modest amount of individual term coverage alongside the group plan is the ordinary answer, and permanent coverage is the answer where the need does not expire.

Renewal, and how the rate of a small employer is set

Every group contract is repriced on a cycle, usually annually, and the letter that arrives reads like an invoice while being a negotiating position.

For a large employer the rate is driven mostly by the claims that employer produced. For a small employer the group is too small for its own experience to be statistically meaningful, so the insurer blends that experience with pooled results from similar groups and gives the record of the employer only partial weight. The consequence, which small employers find hard to accept, is that a good year does not fully earn a decrease and a single large claim does not fully explain an increase.

Added to that are trend, meaning the expectation of rising costs in drugs, dental fees and usage; changes in the age and composition of the group; a pooling charge for catastrophic claims; and the expense and margin of the insurer. Some components are arguable and some are not, and knowing which is which is most of a competent renewal conversation. The renewal article and the small business article deal with the levers.

For the business owner, and what to read first

A plan costs an owner three things: the premium, the administrative time to run enrolments and terminations correctly, and the obligation created by the expectation. The third is underestimated. Once a plan exists, removing it is felt as a pay cut, so it should be sized to what the business can sustain in a poor year rather than what it can afford in a good one.

What it buys is more concrete than it looks. It is one of the few remaining ways a smaller employer can offer what a larger competitor offers, it answers a question every serious candidate asks, and it removes from employees a category of financial fear that otherwise walks into work with them. Whether that is worth the cost is a judgement about the particular business, and any claim that a plan pays for itself should be treated as the sales line it is.

This practice is licensed in insurance. We can explain a plan, read a contract with an employer or an employee, and place and service group coverage. We do not give tax, legal or accounting advice: deductibility, the position of a shareholder and employment law belong with a qualified tax professional, an accountant, or a lawyer or notary.

For a plan member, read what is actually covered, then who is taxed on what. For a household with two plans, read coordination of benefits. For an employer, start with the small business article.

Questions people ask