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Can an employer "self-insure" a disability plan?


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Many employers do not use health insurance for a health plan, and instead pay claims from the employer's general assets.  Some of these employers buy a stop-loss insurance contract to protect the employer (not the participants) against its risk of outsize claims under the health plan.

Can an employer do the same thing with a disability plan?  Is there a ready market for stop-loss insurance contracts regarding disability claims?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Nature of claims is entirely different from health: e.g., low incidence with high average individual exposure from long tails a la workers' comp. You may find stop coverage for STD/LTD offshore at high expense including foreign excise taxes. If domestic health stop loss carriers saw an opportunity for a profitable new product, they woulod have brought it to market millenia ago.

By the way, domestic carriers do write stop loss coverage for dental claims. There is little interest because of lack of risk takers on both sides. Au contraire, there is much cession of life coverage especially among new carriers being risk averse.

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I think theoretically ERISA and Code would let you self-insure disability. The problems are business issues. The one mentioned above, i.e., lack of market on sell-side, is relevant, but my guess is an even bigger issue, and one that partly accounts for lack of market, is the benefit security. Self-insured health plans are dependent on continued funding by employer and employee contributions. Certainly, if the employer becomes insolvent, or is sold, and its health plan goes away, there may be a hiccup with paying runout claims, but the employees move on and get other coverage. If you are long-term disabled, that could be it--you may never work again. If, e.g., that happens to you at 30, the employee needs to know that he or she will receive LTD payments for 35 years, month-in, month-out. Insurance companies are long-term players, and are regulated by states so that they cannot shed their obligations, and even in bankruptcy there are guarantee funds. So the obligor of the LTD is solid and long-term. And LTD always has a waiver of premiums once employee becomes disabled. So with insured LTD, if the employee becomes disabled, he or she leaves with a paid-up commitment from the insurer to pay benefits until age 65 or 66 (assuming the LTD recipient doesn't get better ), and that promise is not dependent  on the longevity, financial health, or willingness of employer to continue plan. It's a paid up obligation of the insurer from first payment to last.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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