Category Archives: Understanding Plans

Understanding what those benefit plans can do for you.

Beneficiary Designations and Estate Planning

Introduction

I’m in the midst of preparing an epic post on FMLA, but an accumulation of events in my personal and professional lives has inspired me to address some basics of estate planning that are tied to benefit plans. A lot of this can be rather depressing – some of the scenarios we talked about in my law school class on wills and estates were pretty heart-wrenching – but these are things that you should think about to make sure your property is distributed the way you want upon your death.

I work in the human resources field and spend a lot of time on benefits administration issues. Sadly, this sometimes includes addressing issues when an employee dies. In most cases, employees leave their affairs in reasonable order, but we’ve had a few cases in the past two years – including a death about a week ago – that have been unnecessarily complicated because of benefit designation problems.

A friend also recently lost her fiancé a few months ago. He was only 30 years old, fell unexpectedly ill, and died after several months of intensive treatment. He owned his house jointly with his mother, has left enormous medical bills, and had no will. So my friend, who had started to combine her household with her fiancé’s, has no legal standing relative to the estate and still doesn’t know if she’ll be able to claim any of her personal possessions from the house. It’s a mess.

I’ll address two specific benefit types – life insurance and retirement plans – as well as touch on issues related to minors and wills. When it comes to these latter two topics, in particular, your best option is to contact an attorney who specializes in estate planning to review your particular situation (and check to see if your employer offers an Employee Assistance Program that can help you prepare a will). Every state has slightly different laws about wills, inheritance, and the handling of funds and guardianship for minors. I’m simply trying to raise awareness about the need to look at these issues.

Life Insurance

One of the benefits of having a life insurance policy is that the funds usually get to the beneficiaries upon your death pretty fast. It avoids probate and is generally not subject to federal taxes. This can be a real boon when your loved ones are faced with funeral expenses and are dealing with a major upheaval in their lives. But you have to have your beneficiaries properly designated to take advantage of these features.

A life insurance policy, whether group or individual, is considered a contract and so is administered under state contract law. There are generally no requirements to name anybody in particular as a beneficiary, but there are also no automatic beneficiaries if you don’t list them.

But let’s address some terminology that I’ve seen trip up our employees:

  • Beneficiary: A person or entity who will get the money from your life insurance if you die. A beneficiary can be an actual person or an organization such as a college or your house of worship.
  • Primary Beneficiary: The person or persons first in line to get the life insurance funds. You can give it all to one individual or you can divvy it up among multiple parties. Most beneficiary designation forms have multiple lines for this purpose where you can enter a percentage. Just make sure it adds up to 100 percent.
  • Contingent Beneficiary: The person or persons who will get the life insurance funds if all primary beneficiaries die before you do. As with the primary, you can split the proceeds among several parties.

Unless state law or your insurance policy say otherwise, the estate of a primary beneficiary does not inherit the person’s share of your life insurance if they predecease you: that person’s share will be distributed among the surviving primary beneficiaries. So if you list your three sisters as your primary beneficiaries but one of them dies before you do, her children don’t automatically have a right to a one-third share of your life insurance. You would have to change your beneficiary form to add them as primary if you want them to get funds upon your death. If you don’t update your beneficiary designation, your surviving two sisters would share the proceeds.

It’s smart to have a contingent named to account for the worst case scenario. For example, it’s very common for couples to name each other as primary beneficiaries, but should both die within a short period of time (in an accident, for example), the longer surviving party will receive the other’s life insurance proceeds with his/her own policy paying to any named contingent(s). If there is no contingent, the funds will go to the general estate to be distributed through probate.

A big problem can arise, however, if people don’t fill out the primary and contingent sections properly. Maybe a person doesn’t know exactly what the terms mean, or maybe s/he simply doesn’t notice how the sections of the beneficiary form are labeled.  The result can be a beneficiary designation that’s unclear and must be interpreted by the plan administrator or insurance company.

In a recent case at work, the employee put his daughter as primary with his two sons as the contingent beneficiaries. Since they’re all minors (an additional wrinkle I’ll address below), it seems odd that he wouldn’t provide for all of them – and based on his conversation with my assistant at the time he was completing his benefit forms we know he intended to leave the life insurance to all of them equally. He simply completed the beneficiary designation form incorrectly.

Fortunately, the employee completed the “percentage share” field on the form for each child, giving each one third. Without this information, we would have had a much harder time getting the insurance company to agree with our interpretation of equal division: his daughter would have received everything with the sons being left out. This distinction is important in this case since his daughter is from his first marriage (the first wife died from childbirth complications) while the boys are from his current relationship.

The moral of the story? Pay attention to the forms! Every insurance company has a bit different design, but Primary and Contingent should be clearly labeled. Also make updates as your circumstances change. Do you want to split the proceeds among your children? Make sure you complete a new designation form if you have another child.

And all of this applies whether the forms are paper or electronic! If the latter, you have even fewer excuses to keep everything updated.

Retirement Plans

Whether it’s a 401(k), 403(b), or some other retirement savings or income vehicle, this is a benefit that also needs attention in terms of beneficiary designations. With most of these plans, you have the added wrinkle of ERISA, a vast federal law first passed nearly 40 years ago that regulates retirement plans (among other benefits). In most cases, ERISA provisions trump – or overrule – state law with regards to plan administration.

One important thing to remember is your employer might not be able to help monitor your beneficiary designations. Depending on the policies of the company that holds the funds (such as Fidelity or Vanguard), your employer might not be able to see who you have listed. YOU have to take responsibility.

The concepts of Beneficiary, Primary, and Contingent that I discussed above with regards to life insurance also apply to retirement plans. But with an extra twist, of course.

The single biggest consideration when it comes to naming your beneficiaries is that, if you’re married, your spouse is automatically entitled to 50%. If you want to leave the funds in such a way that your spouse would get less than 50%, he or she must sign a waiver of their rights to that 50% share.

Note that this requirement is not yet fully explored in a legal sense in the context of same sex marriage. Since the Defense of Marriage Act (DOMA) is still in place as of this writing, the federal government does not officially recognize same sex marriages, even though they are perfectly legitimate under state law in places such as Massachusetts and Iowa. Make sure your beneficiary designations are complete and clear to ensure your spouse receives the funds you intend.

We have a situation at work that is one of the messier I’ve encountered and that demonstrates how important it is to pay attention to the details. Failure to properly update his beneficiaries on his retirement plan will potentially cost the children of one employee thousands of dollars in legal fees to straighten out the mess.

We had two long-term (and highly paid) employees who were married to each other. As we learned shortly before the husband’s death, he had been previously married and divorced over 30 years ago. The man and his second wife – also our employee – had two children. Over the years, they separated but never divorced and cooperated well in raising their children who are now young adults.

Roughly 10 years ago the wife was diagnosed with cancer, and she passed away a few years later. The husband had no need for the funds in her retirement account, so, as part of her estate planning, he had waived all rights to the money. Their children shared the proceeds equally upon her death.

Sadly, a few years ago he was also diagnosed with cancer and passed away less than a year later. He had always been notoriously bad with his paperwork over the years, and, as we learned upon his death, that carried over to his beneficiary designations on his retirement plan. Despite his knowing he should make sure everything was in order – his late wife was the one who was meticulous with this sort of thing – he never quite got around to it. He had even mentioned to one of his kids that he should make sure his beneficiaries were right.

Well, we discovered that the first wife from all those decades ago had been named as his beneficiary on his initial election forms, and he never changed it. Now his children have to work out with the lawyers and the plan vendor who exactly is entitled to this pretty significant pot of money (nearly a million dollars if I recall correctly). They don’t know if this woman is even still alive, what her current name might be, and what the terms of the divorce were. Clearly their mother would have had a claim on at least 50% of the account were she still alive, but their own direct claim is less certain.

I still don’t know how this case will turn out. As far as I know the children are still working on it.

Lesson? Check your beneficiaries!

Minors

The issue of naming minors as beneficiaries or in a will deserves a quick mention. PLEASE check with an attorney about exactly what the best options are since so many of the details vary from state to state.

Minors – children under age 18 – cannot independently manage money or enter into contracts. A parent or guardian must, at least on paper, be involved. This includes receiving funds from an inheritance.

Depending on the state and family situation, funds might be simply put in the child’s saving account, or something as elaborate as a court-monitored trust might have to be established. Do your best to anticipate the particulars of the situation you’re dealing with – and be sure to address the issue with an attorney if you’re doing a will.

The big thing is not to assume how everything will work. Do your research. And, yes, it’s time for another story from what I’ve seen at work.

An employee named his mother, brother, and niece as beneficiaries on his life insurance. He died very unexpectedly about 2 years ago. His niece was 12 at the time.

Both of the girl’s parents are alive, so you would think handling the funds would be pretty easy. Well, no. Seems the parents are split, and they’re arguing about who will handle the money and who has to set up the trust account. Still.

The employee’s mother and brother received their shares within a month or so of his death. His niece has yet to receive her funds.

As for the first story I told you in the Life Insurance section about the man with three children, it’s much cleaner. The daughter has been mostly raised by her maternal grandmother who already has legal guardianship, while the mother of the two boys is their sole surviving parent.

Wills and Medical Directives

Working in Human Resources, I don’t get involved in wills and such. I’ve been thinking about this issue more because of a situation a friend is in that shows you’re never too young to think about things like power of attorney, medical directives and a will.

The terminology will vary a bit from state to state, but here’s how I’m using these terms:

  • Power of Attorney: A legal document you use to designate who will handle your financial affairs when you’re not able to do so.
  • Medical Directive: A legal document you use to designate who should make medical decisions on your behalf when you’re not able to do so.

As I mentioned in the introduction, a friend’s fiancé died recently leaving behind no will, a house owned jointly with his mother (and that holds a bunch of my friend’s personal possessions), and a pile of medical bills. He and my friend were living in a temporary location while the house underwent repairs after being flooded, but it was almost done and so they had started moving things in from storage.

What’s going on is a complex mix of property, intestacy (when you die without a will), and indebtedness law, all pretty much state-specific. His mother will most likely be named executrix of the estate (as of my most recent conversation with my friend, nothing had happened yet with getting everything to the probate court), and so my friend will have to work with her to claim back the personal property that’s in the house and hope that the creditors of her fiancé’s estate won’t care about those small things. (I think she’ll be fine in the end: what’s a used XBox against $500K in medical bills?)

Additionally, while he was in the hospital, even though he had verbally told them (while he was still able) that my friend should make the medical decisions, the medical staff continued to defer to his mother. He had no medical directive on file, and so the hospital clearly felt they had too much of a liability taking direction from a person without a legally-defined status. In this context, “parent” has legal meaning but “fiancée” not so much.

So, in addition to losing her fiancé, my friend lost her say in his care to an extent while he was ill and is now living in a limbo state when it comes to her belongings and living situation.

Complete a power of attorney and a medical directive. Do up a will.

Short and Long Term Disability Insurance

Disability insurance, both short- and long-term, is a valuable part of your overall financial plan.  It offers income protection for periods of serious illness or injury.  Many employers offer one or both of these benefits, often free or at very reasonable cost.  It is also possible to buy individual short and long term insurance – many companies offer these policies at competitive rates.

In this post, I give an overview of how these policies work and their interaction with other benefits and laws.  I specifically address short-term disability insurance for pregnancy and maternity leave, a common concern and use of the benefit.

Short Term Disability Insurance

What Is Short-Term Disability Insurance?

Short-term disability (STD) insurance is coverage that acts as income replacement while you are too ill or injured to work for an extended period of time.  Plans typically cover absences for three to six months, depending on the terms of the policy.

Filing A Claim

If you have short-term disability insurance through your employer, you might have to use any available sick leave before the STD kicks in.  You might also have the option of saving your sick leave and going straight to the disability pay.  The application and payment process will vary depending on how your employer has structured the benefit – whether you work with the insurance company, the Human Resources department, or some combination.

If you have an individual plan, you will probably be working directly with the claims department of the insurance company from which you’ve purchased the policy.

Regardless of how you have to file a claim, you must submit medical documentation that supports your claim that you cannot work.  The insurance company or your employer will often have the option of requesting a second medical opinion.

How Much Will STD Pay?

There is a lot of variation in the level of income replacement among short-term disability policies.  It can range from 60%-95% of your salary at the time of disability.  If you have a group benefit through your employer, you should be able to get this figure from your benefits staff.  If you purchase an individual short-term disability insurance policy, be very clear about how much coverage you are buying.

This brings up the issue of how much disability insurance will cost.  It’s hard to give a representative figure because there’s an incredible amount of variation depending on your location, profession, salary, age, and whether or not you have a group or individual policy.

The premiums for group plans should be clearly stated by your employer, are often based on your salary, and will be deducted from your paychecks.  For an individual plan, get multiple quotes since rates can vary a lot depending on the company, the level of the benefit, your profession, and what medical conditions are eligible under the policy.  Make sure you find out if the benefit is capped at a certain income level.

Some employers have what is called a self-insured STD plan, which means they pay any claims directly out of their own funds and don’t have an insurance policy.  In this situation, you will likely be paid through the normal payroll process.  Where an insurance policy is involved – whether individual or group – you will usually be paid by the insurance company.

Tax Treatment

Whether or not payments you receive under a short-term disability insurance policy are taxable income depends on how you paid the premiums, at least for federal taxes.

  • If you pay the premiums with before-tax dollars – or your employer pays the premiums – any benefits paid will be taxed.
  • If you pay the premiums with after-tax dollars, any benefits paid will not be taxed.

States and local governments can treat STD benefits differently than does the federal government.  For example, Pennsylvania does not tax any short-term disability benefits, and the city of Philadelphia exempts STD payments from the city’s wage tax.  Your employer or insurance company should have information about the taxability of your benefits.

Long Term Disability Insurance

 What Is Long Term Disability Insurance?

Like STD, long-term disability (LTD) insurance is coverage that provides income replacement in the event of serious illness or injury that prevents you from working.  LTD, however, is used when your recovery takes much longer or you are permanently disabled.  Benefits usually kick in within six to twelve months of the initial disability, depending on the terms of the policy.

Employment-Based Long-Term Disability Insurance

Many employers offer LTD and pay for the premiums.  In some situations, you can “buy up” the benefit, meaning the employer pays for a base level benefit, perhaps a 60% income replacement level, and the employee can pay for supplemental coverage that might add another seven to ten percentage points to the benefit.

Individual Policy

Like STD, you can also buy an individual policy on the open market from one of many different insurance companies.  Shop around.  You might be able to get discounts for buying multiple lines of insurance from the same company, so don’t hesitate to get a whole range of products quoted together, such as STD, LTD, life insurance, and auto and house insurance.

Benefit Levels and Filing Claims

By far the most common benefit levels for LTD insurance are 60% and 66% income replacement, and there’s often a cap on the income base that will be covered.  So high wage earners should examine the terms of their policy – group or individual – very carefully to make sure there’s no unpleasant surprises in the event of a claim.

When filing a long-term disability claim, you will, of course, have to provide medical documentation.  Don’t be surprised if it’s subject to more rigorous evaluation by the insurance company than for a short-term disability claim.  After all, the potential liability is much higher for the insurance company: if you’re 35 and found to be permanently disabled, they will have to pay out over 30 years of benefits.

Most plans will require you to also apply for Social Security Disability Insurance.  If approved, the LTD payments from the insurance company will almost definitely be offset by your Social Security benefit.

Laws Related To Disability Insurance

There are a number of laws at both the federal and state levels that affect disability insurance coverage.

State Laws

A number of U.S. states regulate disability insurance policies quite closely.  They set minimum standards and might control the premiums that insurance companies can charge.  A few, such as California and New Jersey, even have their own state short-term disability insurance programs.

These state disability programs are funded by employers.  Employers can choose to pay into the fund or can provide a private plan that at least matches the level of benefits offered by the state program.

Check with your state insurance board or your employer to find out what regulations affect disability insurance in your location.

Pregnancy and Maternity Leave

Under the Pregnancy Discrimination Act of 1978, pregnancy and maternity leave must be treated the same as any other disability for purposes of short-term disability benefits.  Bed rest, if medically indicated, is included.  Most states have guidelines that set how much disability you are entitled to after delivery.  Common time frames are

  • Vaginal delivery:  6 weeks
  • Caesarean delivery:  8 weeks

If you are eligible for Family and Medical Leave (FMLA), you will also have 12 weeks that will likely be administered concurrently with your disability.  Your employer can set policies about how much paid leave you can use in addition to the STD.

For example, the company might let you use sick leave during your FMLA period and then any accumulated vacation time for up to 6 months total.  Assuming you didn’t have any bed rest before delivery; had a vaginal delivery; and started with a leave balance of 35 days sick and 15 days vacation, your maternity leave might look like this:

  • Weeks 1 through 6:  Short-term disability payments; first 6 weeks of FMLA
  • Weeks 7 through 12:  Sick leave (30 days); remaining 6 weeks of FMLA
  • Weeks 13 through 15:  Vacation
  • Weeks 16 through your return to work:  Unpaid

If you are planning on getting pregnant, check with your benefits department to make sure you understand what types of leave are available to you.  There can be an enormous amount of variation by employer within the framework of the Pregnancy Discrimination Act, FMLA, and short-term disability insurance provisions.  Remember, in most states, employers are not required to have a short-term disability policy.

Conclusion

Disability insurance, particularly if you don’t have a very large emergency fund, can be an important part of your overall financial plan.  Whether you can get it through your employer or must buy it on the open market, think about how you would pay your living expenses should you fall seriously ill or get injured when making your decision about taking the coverage.

What Is COBRA Health Insurance Coverage

What is COBRA?

People have often heard of COBRA health insurance coverage but aren’t really sure what it is or how it works. The term COBRA actually stands for Consolidated Omnibus Budget Reconciliation Act. It’s a title often applied to giant budget bills passed by Congress, generally appended by the appropriate year.

But when most of us use the phrase COBRA benefits we’re referring to a law passed in 1986 that gives employees and their dependents the right to continue their health insurance when they lose coverage under an employer-sponsored plan. People already recognized back in the 1980s that there are significant gaps in our health insurance system, and this law was an attempt to address one part of the problem.

The Department of Labor (DOL) regulates COBRA, setting the rules under which employers must administer COBRA health insurance coverage.

Eligibility

There’s two parts to figuring out if you can take advantage of the COBRA legislation. Is  your (former) employer subject to the law, and have you or your dependents experienced a qualifying event?

Employer Size

Small employers do not have to offer COBRA health insurance plans. Only employers that have 20 or more employees for more than 50 percent of the prior calendar year are subject to the rules. The DOL has good explanations of how to figure out if an employer is subject to COBRA on its web site.

The reasoning behind this exception is that people who elect COBRA tend to be heavier users of medical services than average. Small business health insurance premiums are more sensitive to large claims because they have a smaller pool available to absorb losses.

Your Status

There’s a whole list of situations that make you eligible to elect COBRA. By far the most common reason is that you left your job, either voluntarily or not. Generally, an employer would have to show you were fired for gross misconduct to deny you COBRA benefits. A layoff – or reduction in force – is a qualifying event.

Other events that would qualify you and/or your dependents for COBRA health insurance coverage include

  • Divorce. Your ex-spouse would be eligible.
  • Overage dependent. Your child reaches age 26 and can no longer stay on your plan.
  • Reduction in hours. You are no longer eligible for the employer-sponsored benefit plan.
  • Your death. Any dependents (spouse, children) covered under your insurance plan would be eligible.

There are several variations on each of the above categories, but these are the biggies.

The base period for which you can get COBRA coverage is 18 months. In some situations, such as death, the covered beneficiaries are eligible for up to 36 months.

Your employer is required to notify you and any covered dependents of your right to elect COBRA within 30 days of the triggering event – 44 days total if there is a third-party administrator involved. You have an obligation to notify your employer or plan administrator of a divorce, legal separation, or child ceasing to be covered under the plan within 60 days of the event.

You are entitled to 60 days to elect COBRA coverage.  Your first premium payment is due within 45 days of making your election.

Cost

One of the main complaints about and drawbacks to COBRA health insurance is the cost.

Your employer – or former employer – can charge you 102% of their premium cost for the plan coverage (the extra 2% is an administrative fee). Since most employers who sponsor health benefits cover at least part of the cost for active, eligible employees, the full price can give you sticker shock.

The cost structure might work something like this:

Coverage Total Premium Employer Subsidy Employee Cost COBRA Cost
Single $500 $400 $100 $510
Family $1,200 $800 $400 $1,224

Note that there’s no federal rules currently about what percentage of the health insurance premium an employer must subsidize for employees. I just picked the above numbers because they worked out neatly!

What Coverage Will I Get?

By law, health insurance coverage under COBRA must be the same as what the other plan participants (e.g., the active employees) get. You will be subject to any changes to the plan design, such as increases to co-pays, but you will also be able to change your election during Open Enrollment.

You can’t, however, add any dependents (except newborns) to your plan while on COBRA if they weren’t already covered when you lost coverage. Additionally, if the employer completely terminates the plan, you will lose your coverage the same as the active employees.

Why Should I Elect COBRA?

The obvious reason to pay the high cost of COBRA is that medical bills can be exponentially greater. If you or a dependent have a serious medical condition, the decision can be a no-brainer.

But a less obvious reason to elect COBRA is the issue of pre-existing condition clauses. While the Affordable Care Act (aka Healthcare Reform) has started to address this problem – insurance companies can no longer apply them to children under the age of 19, for example – they will not be fully eliminated until 2014.

If you get a new job and the employer’s insurance plan has a pre-existing condition clause, you will not be able to get insurance coverage for a medical condition if you sought treatment for that condition within the past few months prior to coming on the plan. You will be subject to a waiting period before your new insurance will pay anything related to any such pre-existing conditions.

One way around these clauses is if you have not had a break in your medical coverage of more than 63 days. Under a provision of the Health Insurance Portability and Accountability Act (HIPAA), you can get credit for your prior medical coverage that can potentially eliminate any waiting period in your new policy.

COBRA coverage counts under HIPAA in reducing or eliminating any waiting periods for pre-existing conditions. So electing COBRA can make strategic sense if you have a medical condition for which you must seek treatment before you are covered by a new plan.

Of course, so many of the factors involved can be unpredictable. And, often, you simply cannot afford the COBRA premiums.

Alternatives to COBRA Health Insurance

There are some sources for help out there, particularly for children, although they can be difficult to track down and resources are stretched. Most states have relatively cheap health insurance coverage for children through CHIP or Medicaid with information on their web sites. Adults may be eligible for assistance for certain conditions in some states.

See if you can go on your spouse/partner’s plan. If you notify their employer within 30 days, your losing coverage must be treated as a qualifying event that permits election changes.

The federal government has also established a portal at Healthcare.gov that has information about changes being introduced by healthcare reform as well as links to help you find alternative health insurance. You might be able to find a catastrophic plan that has more affordable premiums. These plans are designed to cover truly serious conditions, leaving you to pay more in out-of-pocket costs. But the premiums will likely be significantly lower than you will pay under COBRA health insurance coverage.