EI Updates - to change or not change your disability plan?

In November the Federal Government announced that they will extend the EI Sickness benefit period to 26 weeks from 15 weeks as of December 18, 2022.

At this point, most, if not all insurance carriers have share an update on this. Some with helpful tools. But mostly the updates are light on advice and but there seems to be a need for more. This is because there’s not a set you have to do ABC. The plan sponsor’s decision to change or not change their disability benefits is unique to each organization and decision makers are looking to their group benefit advisor for, well, advice.
We have two scenarios to consider:

1. There is short term disability on the plan – with or without long term disability
2. There is not short-term disability on the plan, but there is long term disability on the plan

Let’s get the easy one out of the way first. Short Term Disability
Should an employer make changes to their disability plan if there is short term disability being offered – this is either as a stand alone or in conjunction with long term disability.
Right now - no. Hang tight for further information.

Why you ask? What about the EI rate reduction program? The Feds plan to make changes to the EI rate reduction program and further information will be coming at some point in 2023. Right now there is no obligation to update your plan. You will remain EI rate reduction eligible. Employers who change their program now, will likely end up making changes again in the near future.
 
Before we get into Long Term Disability, first a quick level set is required

1. The EI sickness benefit is second payer. It does not offset the group benefit disability plan.
2. The group benefit plan is first payer (in some cases). If the EI sickness benefit is available and the group benefit plan is available then the group plan will pay and EI will top up (an unlikely situation but possible if a plan member has a low non-evidence maximum and did not apply for excess coverage).
3. The EI benefit is 55% of one’s average insurable weekly earning up to a maximum of $638 per week. This is the equivalent of an annual salary of $60,300
4. Recipients of EI pay income tax on the benefit received as this is a form of income. It is not deducted at the source and taxes will be owed upon filing the tax return.

I said the EI sickness benefit is first payer twice because it’s an important factor in this decision to change or leave unchanged the LTD. It’s also the reason why the EI rate reduction program exists.

Now that we’ve had an EI refresher, we’re ready to discuss LTD
In most plans, the LTD is a non-taxable benefit where the plan member/employee pays the premium. Working under this assumption, let’s first tackle the big reason why an employer would choose to aligned the LTD waiting period with the EI payout period.

Note 26 weeks is the equivalent of 6 months or 182 days. But, EI has a 7 day waiting or elimination period. So when calculating the LTD waiting period to align with EI this should added, equaling 189 days.

The first reason organizations will consider extending the waiting period is SAVINGS! The rate paid for the LTD plan will (probably) be reduced if you change the waiting period aka elimination period from 112 or 120 to 26 weeks (plus 1 week for the elimination), aka 189 days.

And who doesn’t like to save money?

But how much money are we talking about here? Spoiler alert, not a lot. While I try to be unbiased and neutral here, my opinion is this is not a good reason to change the plan. Let’s look at the math.
Assumptions for this illustration: (don’t be a picky panda, this is just quick math to show you why it’s not a lot of savings)

• The LTD rate is $3.00/100 of volume
• First we’ll run a $60,000 salary illustration to align with the average Canadian income assumptions made by EI. And then a high-income earner at $150,000.
• There is no NEM or that excess insurance had been applied for and approved.
• $10,000 benefit maximum
• Keeping the payment formula simple – 66.67% of monthly income and…
• Let’s forget the all-source maximum is a thing.

And now the big assumption, this change will warrant a 10% reduction to our $3.00 rate. I’ve seen quite the spread on the require rate reduction, but 10% is an easy number for an illustration, and I prefer to look at a worse case scenario instead of having rose coloured glasses on.

First $60,000 – what will an individual employee save with a 10% rate reduction?
$3.00 x 10% = $0.30
New LTD rate is $2.70 ($3.00 - $0.30 = $2.70)
$60,000 x .667 / 12 = $3335 of monthly benefit
Cost of LTD at $3.00:  3335 x 3 /100 = $100.05
Cost of LTD at $2.70:  3335 x 2.70 /100 = $90.45
Monthly savings is $9.60  (100.05 – 90.45)
Savings per pay assuming biweekly pay schedule is $4.43

I know that life is expensive these days, and I know people are looking for ways to save money. But this isn’t it. $9.60 per month is not a meaningful amount. Are some people struggling to the point that this amount would help? Yes, I’m sure there are. But overall, $4.43 isn’t going to be noticed on one’s paycheck.
 
Second $150,000 - what will an individual employee save with a 10% rate reduction?
$3.00 x 10% = $0.30
New LTD rate is $2.70 ($3.00 - $0.30 = $2.70)
$150,000 x .667 / 12 = $8338 of monthly benefit
Cost of LTD at $3.00  8338 x 3 /100 = $250.14
Cost of LTD at $2.70  8338 x 2.70 /100 = $225.13
Monthly savings is $25
Savings per pay assuming biweekly pay schedule is $11.53

In this scenario, the savings are slightly noticeable at $25 per month. But $25 a month still isn’t significant, especially when your individual income is $150,000.
 
Now that the math is out of the way, what other reasons are there to keep the LTD as is with a 112 or 120 day waiting period:

• There is value in early intervention and disability management with the insurers. The longer a person is off work, the more challenging it is to return to work - As they say in Game of Thrones “It Is Known”.  Longer duration periods mean larger reserves and could increase the LTD rate in the long run.
• Insurers also provide resources like rehab programs, pharmacogenomics, and more to assist in the return to work. I’d also venture to say an insurers’ fraud detection is better than EI’s.
• After the 6 months, or 26 weeks is up with EI and the individual begins their application for LTD, can you imagine how difficult it will be to collect the medical information required to have your LTD claim approved? There could be an increase in declined LTD cases due to a lack of medical documentation during this time off.
• The LTD benefit in most cases pays more than EI. Again, EI is taxable and 55% (up to a maximum annual earnings of $60,300). Whereas LTD is mostly non-taxable at 66.67% or some graded formula to limit the impact of the all-source maximum. When LTD is taxable, often the benefit will be increase to 75% of earnings. Take our $60,000 earner, on LTD their benefit is $3335 a month or $769 per week. No tax owed. Compared to EI which is $638 per week and you have to pay tax on it.

 
Last up, let’s make the case to change the LTD waiting period to 182 days.

Besides the small cost savings, there are two significant scenarios to consider:

• The EI benefit pays more than the LTD.
• This is the big one – someone has to tell EI to stop making payment!

It is possible that for some group benefit plans, EI offers a higher benefit amount. This will be employers with the bulk of employees at a salary much less than $60,300 (remember we have to take into account the LTD benefit percent is higher than EI and there is no tax owed). OR you have a group where the NEM is low and no one, or mostly no one has applied for excess coverage. Small Businesses – I’m looking at you! LTD NEM’s on groups with less than 10 lives could be as low as $1000 - $1500. $1000 a month, is a lot less than $638 a week. Group Benefit Advisors, this is a great time for proactive communication to plan members to encourage them to apply for their excess coverage. Imagine how defeated an employee, who is struggling with a disability, would feel when they have applied for LTD, they think they have $3000 of coverage, only to find out it’s actually half of that. The good news here is, EI could top up these individuals to the weekly maximum.
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If you don’t change the LTD waiting period to align with EI, there will be about 3 months of overlap between EI and LTD. Since LTD is the first payer, the disabled individual will need to let EI know of this source of income when approved. If they do not notify EI, EI will continue to pay the disabled person which will create an overpayment. This overpayment is not a gift from the government. It will need to be paid back with interest when the individual files their taxes or when the government becomes aware of the overpayment. Which ever happens first.

​This situation will happen. But I think it will be infrequent for a number of reasons. First when you’re on EI you have access to the portal to update your situation, and you’re generally in contact with them. So there are natural opportunities for updates. Second, the insurance carriers will put protocols in place to help prevent this situation. At Equitable Life for example, their case managers will let employees know that they need to inform EI of their disability payments, plus they will include this info in the letters sent to the employee. I’m sure other insurers are putting similar protocols in place and over time this will become smooth sailing.
This is also an opportunity for the group benefit advisor to help their clients put their own disabled employee communication protocol in place. 
 
What other reasons are you discussing to change or not change?