Cost Tips

Risk Assessment (Benefit Tips ® - © 1999)

It is prudent to review some of the risks associated with providing employee benefits.

Fiduciary Liability

  • Have the investment options of your retirement savings program been clearly explained to your staff on a regular basis?
  • Were minutes and attendance taken at employee communication meetings?
  • Are employees able to give investment instructions directly to the plan administrator and receive prompt confirmation of transactions?

New Staff

  • Are letters of offer given to new employees to clearly specify compensation, performance and attendance expectations?

Terminated Employees

  • Are letters of termination given to all employees who sever their employment?
  • Do those letters specify the dates that benefits terminate as well as conversion options?

In most cases, employers must continue all benefits until the end of the period of employment. Many jurisdictions include the time equivalent of any lump sum payout such as vacation, sick-time and severance.

Employers should have a policy that determines when the employee can no longer fulfill their part of the employment contract. The period is often as short as 6-months and sometimes extends to age 65.

The policy should be reviewed by legal counsel, clearly specify the conditions under which each benefit will continue and the conditions under which they will be terminated. Employee life insurance normally contains a waiver of premium provision that will continue coverage while the employee meets a certain criteria. The long-term disability insurance premiums are normally waived for an employee during a claim payment period.

Conversion to Personal Coverage

Life insurance and sometimes long-term disability insurance benefits can be converted to personal coverage within the 30-day period following the termination of group coverage. The conversion feature adds 4% to the long-term disability insurance premium rate but can save considerable time and money when negotiating severance packages.


It is critical to provide the employee with the forms and contact information necessary to apply for benefits and convert their insurance to individual coverage. Your liability can be minimized by documenting your communication and dealing with a broker and insurer that provides service to terminated employees.


  • Is your medical plan discriminatory?
  • Is coverage different for different medical conditions?
  • Are some lifestyle drugs covered (birth control pills) while others excluded (penile erectile dysfunction)?
  • Uniform maximums and health spending accounts provide an alternative to exposing yourself to charges of discrimination.

Retiree Coverage (Benefit Tips ® - © 1999)

Retiree benefits pose a significant risk and should be avoided unless they are essential to achieving the objectives of benefits program. Retiree benefits vest upon retirement and cannot be subsequent reduced by plan amendments. Even if insurers are no longer willing to insure retirees, the employer has a legal obligation to provide coverage.

Companies must recognize retiree benefits as a deferred compensation liability and accrue the cost during an employee's working years. Calculating the liability for retiree benefits is complex because turnover, mortality, inflation and utilization need to be considered. The calculation can be dramatically simplified if a defined contribution health spending account is used to eliminate the inflation risk.