When new benefit plans are implemented we typically have several options on how to define earnings.
In situations where plans have a flat life amount and no long-term disability (LTD) benefits, the definition of earnings is of no consequence. In other cases, where the life amount is calculated as a multiple of earnings or where there are income-related LTD benefits, it can be very important.
It is vital that the advisor knows how staff are compensated to ensure that the plan meets these needs appropriately. Even more important is reporting the earnings accurately to the insurer. Failing to do so could result in benefits being paid out at a reduced level or, worse, in an employee not receiving the level of benefit they are entitled to.
- three times earnings for life insurance and AD&D;
- and a two thirds flat scale LTD benefit
- the employee is compensated by a $50,000 base salary and $50,000 in commissions annually
How do we define earnings? If it is on base salary only, the life benefit would pay out $50,000 and the monthly LTD benefit would be $2778. If earnings is defined using base salary plus commissions the life benefit would be $100,000 life benefit and the monthly LTD benefit would be $5556.
Either definition of earnings can be applied, as long as the employer and employee have the same understanding and the information is communicated clearly in benefit booklets and through employee meetings.
Problems will inevitably arise if the employee is under the misconception that their benefits are determined by base salary plus commission when in reality they are based solely on base salary.
Another potential issue is when the employer has structured the plan to include base salary and commissions but is only reporting the base salary information to the insurer. In this situation, a employee who needs the LTD benefit would only receive half of what they are entitled to and the employer could be held accountable for the remainder.
This has the potential to result in a huge liability for the employer. If the employee was just like the example used above and became permanently disabled at 35 years old, the liability for the employer could amount to over a million dollars.
Commissions are not the only thing to consider when defining earnings. What about situations where there is ongoing, regular overtime or regular or annual bonuses?
It is imperative that the plan document clearly states the definition of earnings as the employer intends and that this information is thoroughly communicated to staff and reported to the insurer properly. Only by doing so can the employer avoid any potential liability or employee issues.
By Dave Patriarch, Mainstay Insurance Inc.
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