Getting More Disability Coverage for Your Law Firm at Less Cost
Are your firmís attorneys adequately protected in the event of an illness or disability? How can you, as a small law firm managing partner, make sure that your firm is providing the basic disability benefits to administrative and support staff while addressing financial demands of your highly compensated attorneys, without incurring significant overhead costs?
Many law firms provide both administrative staff and lawyers with disability coverage through group insurance plans purchased through the firmís insurance brokers or directly through life and health carriers. Therefore, managing partners may already be aware of both the up and down sides of group disability plans.
The positive: these plans are tax-favored because group premiums are considered both tax-deductible by the firm and nontaxable to the employee and attorney. The down side: group disability policies generally do not provide nearly enough coverage to make highly compensated attorneys, and especially the senior most law firm partners, feel secure enough. Thatís because most carriers limit the percentage of income they will insure for each group member to 60 percent of the memberís total compensation. Additionally, that percentage of insurance coverage decreases as compensation increases.
The maximum benefit amount insurers will issue is based on factors such as the size of the group to be insured, the type of industry, the geographic location and the aggressiveness of the particular carrier. Nonetheless, maximum monthly benefits, when combined with the percentage limits, restrict payments to highly compensated attorneys.
For example, a lawyer earning $300,000 annually may face a maximum benefit of $10,000 per month (only 40 percent of compensation). That is why many attorneys have opted to supplement their firmís group disability coverage with, what is typically very expensive, individual coverage. But the forward-thinking, small firm managing partner can now bring a new solution to the partnersí table Ė and that solution can provide the firmís highest compensated attorneys with significantly more benefits for much less money, at virtually no additional cost to the firm.
Group Supplemental ApproachThe rise in compensation packages combined with the fact that the highest paid partners are the least insured, has prompted insurers to develop group disability supplemental plans, popularly known as disability buy-ups.
How a group disability plan defines compensation is a matter of negotiation between the firm and the insurance company. The most restrictive definition explains compensation as salary (in a corporate environment, this means W-2 income) excluding overtime and bonuses. The most liberal definition equates compensation with all of the cash payments a top earner receives (including pension and profit-sharing contributions).
Types Of Buy-UpsBuy-up plans come in different shapes and sizes.
- The employer-paid plan. When employers pay the premiums on buy-up plans, those premiums are tax-deductible. While the premium payment is not considered as taxable income to the employee, the employee does have to pay tax on any disability benefits received. Firm costs are the primary constraint with this type of plan.
- The employer-sponsored plan. This is the most popular approach. The firm merely acts as the plan sponsor, with employees paying the premiums. If paid with post-tax dollars, the employees do not pay tax on benefits received. If the employer has an IRC section 125 plan in place, the premiums are paid with pre-tax dollars and benefits are taxable. Because employees own these disability policies, the policies stay with the employees if they change jobs. This is one of the few fringe benefits employers can provide without a cash outlay.
- The hybrid plan. The employer pays the premiums for a select group of employees. Those premiums are tax-deductible to the employer, however benefits are taxable to the employee. Other employees can purchase policies on a voluntary basis with their own funds. Any benefits they receive are not considered taxable as the employees paid the premiums with post-tax dollars.
- Plans are two-tiered. The first tier is a guaranteed issue policy Ė the carrier asks no medical questions and is obligated to issue a policy at standard rates. The second tier requires some simple medical questions: Are you presently at work? Have you been hospitalized in the last year? With second-tier plans, the carrier may decline to issue the policy, charge extra premiums or partially restrict coverage, perhaps excluding coverage for something such as a spinal injury. The guaranteed-issue coverage will help the firm solve any problems with employees who have medical problems.
- The eligible group is always limited to the highly compensated. The larger the group, the more significance this holds. A buy-up policy targets those in need of a higher percentage of coverage and excludes, by definition, lower-paid workers, thereby offering the highly compensated a new opportunity to increase coverage.
- Underwriting requirements are negotiable. Because this is a lucrative market for insurance companies, competition is fierce. Administrators can and should negotiate the number of persons in the group, the amount of benefits in both tiers and the definitions of compensation and disability, along with premium rates.
- Letís take another look at the example of the partner earning $300,000 a year and is entitled to only a $10,000 monthly benefit under the companyís group plan. Hereís how a typical buy-up plan might work for that attorney. Most carriers will discount the underlying group coverage of $10,000 by 25 percent (or 35 percent). Because of discounting, the lawyer is now deemed to have only a $7,500 monthly benefit from that plan. The firm offers and issues a first-tier (guaranteed-issue) monthly benefit amount of $2,500. It also issues a second-tier benefit (nonguaranteed, but simplified underwriting) of $2,500. The result is a $15,000 monthly benefit ($10,000 base group, $2,500 first tier, $2,500 second tier) for the senior lawyer, or 60 percent of covered compensation instead of only the 40 percent originally quoted.
What You Can Look ForSmall firm managing partners need to look at several additional factors when helping their firms evaluate disability buy-up plans.
In situations where a partner pays for the buy-up, the key issue is the availability of cash to pay premiums, presumably for the long-term. Failure to make premium payments means coverage for the partner ends Ė a group not likely to be happy when it hears their firm no longer is paying for these benefits.
Small firm managing partners can work with their CFOs or insurance consultants to evaluate the firmís current base group disability insurance coverage to see whether it can increase maximum benefits. If so, the firm must determine what the cost will be for lower-paid vs. highly compensated employees. As a result of the two limits discussed earlier, the increases in coverage that buy-up policies provide go only to higher paid partners, executives and staff members.
In addition, small firm managing partners should consider asking their brokers and the insurance carriers bidding on the group buy-up coverage to quote the employerís base group disability coverage as well. This may make the prospective buy-up carriers more liberal in amounts of coverage, compensation definitions and guaranteed issue amounts while at the same time putting the current base group carrier on notice that it needs to be competitive in its pricing and coverage.
Finally, small firm managing partners can help analyze the ďfirm censusĒ to determine who might be eligible for the buy-up and to make sure the plan fits into the current benefits package offered to highly compensated partners, executives and staff members.
Stanley B. Siegel, JD, is president of HR&S Financial, a Philadelphia-based financial services company offering insurance and personal financial planning services. His e-mail address is .