The Overshadowing of the Uninsured

Despite the increased emphasis on health care issues in the 1990s, the number of uninsured Americans continues to steadily rise. While economic growth generally increased family income levels over the past 15 years, the costs of health coverage have risen faster dampening the expansion of health coverage for many working families. Wherein 34.7 million people, about 13.9 percent of the U.S. population, were uninsured in 1990, an estimated 44.3 million Americans, or 16.3 percent of the population, were without health insurance by 1998.^[28]

According to U.S. Census Bureau figures, the total percentage of uninsured Americans moved up to 15.6 percent by 2003, as shown in Figure 1.

Source of Health Funding	2003 U.S.Population (millions)	% of Population
Employer Funded	174.0	60.4
Direct Funded	26.8	9.3
Subtotal Private Coverage	200.8	69.7
Medicare	39.5	13.7
Medicaid	35.7	12.4
Military	10.1	3.5
Subtotal Public Coverage	85.3	29.6
Uninsured	44.4	15.4
TOTAL U.S.Population	288.2	See below
Note: Numbers and percentages do not add up to 100 percent, as many Americans have duplicate coverage or may be covered by more than one source (e.g., retirees who have Medicare coverage and also supplemental private coverage). Source: "Inventory, Poverty and Health Insurance Coverage in the United States: 2003," U.S. Census Bureau; Department of Labor, www.census.gov.

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Figure 1: Sources of Healthcare Funding 2003

The disparity of the uninsured is most evident when the data is examined by race: 10.6 percent of white Americans are uninsured, as compared to 19.6 percent for African Americans, 27.5 percent for native Americans, 18.6 percent for Asian Americans and 32.8 percent for Hispanics (regardless of racial origin). Geography makes a difference, with the highest rates of uninsured in Texas (24.6 percent), New Mexico (21.3 percent), California (18.7 percent), Nevada (18.3 percent) and Wyoming (16.5 percent).

Aggravating the problem is higher costs of health insurance for smaller businesses, which do not have the same ability to spread risks or to self-insure as larger companies. Other concerns deal with employers who feel pressured to pass along additional costs to their employees if health care costs continue to increase faster than general inflation, or if employers face additional costs due to legislation permitting plan members to sue plan sponsors.

Some studies also point to a fundamental structural change in the movement of employment in explaining some of the reduction in employer-based health insurance. Employer funded healthcare accounted for 64.2 percent of healthcare funding in 1987, which dropped to barely 60 percent in 2003 (see above). During the same period there was a similar reduction in the number of Americans working in the manufacturing sector, from 24 percent in 1987 to 18.8 percent in 2002. Many of those workers shifted to the personal services sector, which hosts a significantly lower rate of health insurance coverage; 69.4 percent in manufacturing in 2002 compared to 43.2 percent for the personal services sector.

The growth in public and private initiatives on ways to extend coverage to the uninsured, especially children, underscores the societal importance being placed on tackling this issue. Without consistent health care coverage, medical treatment is often deferred until conditions reach acute stages. Patients lacking health insurance often flood hospital emergency room, many seeking primary care that would normally be delivered in a physician's office. The number of ER visits jumped 23 percent over five years, from 89.8 million visits in 1998 to 110.2 million in 2002, General health also can be further jeopardized without regular preventive care and recommended screening tests.

The apparent correlation between increases in health care costs and the growth in the number of uninsured persons underscores the importance of continuing to evolve managed care in a manner that can continue to control costs and make benefits more affordable. As public policy is shaped to further extend coverage, managed care programs will continue to be an important vehicle used to deliver health coverage.

NATIONAL INSURANCE | Tax Considerations

Class 1 National Insurance is payable by employees and employers. This accounted for 95 per cent of the total National Insurance fund in 2003/04. Class 1 contributions are payable by the employee (primary) and the employer (secondary). The liability to Class 1 National Insurance arises to the extent that earnings are paid to an individual, not earned. Also, unlike income tax, which is an annual charge, National Insurance is calculated on the earnings paid in an earnings period.

For 2004/05 the employer's rate of National Insurance is 12.8 per cent and the employee's rate is 11 per cent up to the upper earnings limit of £31,720 and 1 per cent above that.

Class 1A National Insurance contributions are payable by the employer on the provision of benefits in kind. This is payable at 12.8 per cent.

All benefits or facilities provided to an employee by reason of employment are generally taxable based on the cash equivalent value of the benefit or facility. In ITEPA 2003, the legislation on the taxation of benefits is contained within the benefits code. This covers in particular, expenses payments, vouchers and credit tokens, living accommodation, cars, vans and related benefits and loans.

There are special tax rules that apply to provision of benefits to directors and also to employees who earn more than £8,500. For those individuals who earn less than £8,500 (including benefits), there is no need to submit a P11D form with details of all benefits provided, to the Inland Revenue. This limit of £8,500 has remained for well over 25 years, resulting in the vast majority of employees exceeding the limit. The value of the benefit used to be taxable based on the cost to the employer. However, this has changed and now the value of the benefit is taxed upon the cash equivalent or monetary value.

Insurance And Insurable Risk | Risk Concepts and Employee Benefit Planning

Insurance is one of the most popular methods of funding employee benefit plans, but, as explained in later chapters of the Handbook, many other options exist. The advantages and disadvantages of using insurance in the design of a benefit plan are discussed:

Advantages of Insurance

A number of reasons account for why insurance can be used effectively in an employee benefit plan. One advantage is the known premium (cost); it is set in advance by the insurance company. The employer may have better control over its budget with a known premium, because any high shock losses would be the problem of the insurance company and not the insured. Having an outside administrator also can be an advantage to the employer. The employer does not have to get involved in disputes involving employees over coverage of the plan, because these would be handled by the insurance company. Employees may prefer insurance to some other form of funding in order to obtain the financial backing of an outside financial institution. This, of course, depends upon the financial strength of the insurance company selected, and care should go into this choice. Insurance companies often are leaders in the area of loss control and may help in the design and implementation of systems designed to control costs for the employer. A final advantage is that it may be more economical for an employer to use insurance rather than other alternatives. The insurance company may be more efficient and able to do the job at a lower total cost.

Disadvantages of Insurance

Insurance is not always the preferred method of funding employee benefit plans. A number of costs are involved that must be considered. Insurance companies charge administrative expenses that are added to the premium (or loaded) to compensate for their overhead expenses. Home office costs, licensing costs, commissions, taxes, loss-adjustment expenses, and the like all must go into the loading. One must realize that the premium covers not only direct losses but also the insurance company's overhead as well. The amount may vary from a small percent of the premium (e.g., 2 percent to 5 percent) to potentially a very high amount (25 percent or more) depending on the type of contract involved. Another potential disadvantage is that employer satisfaction is directly affected by the insurer's ability to handle claims and solve problems. Slow payment or restrictive claim practices can have an adverse effect on employees.

Whether something is an advantage or disadvantage often depends upon the specific insurance company involved. It is important to use care in the selection of an insurer. Checking out the insurer with other clients and carefully analyzing the carrier's financial stability are critical elements in the selection process.

Characteristics of an Insurable Risk

It often is said that anything can be insured if one is willing to pay the premium required. Insurance companies, however, normally will insure a risk only if it meets certain minimum standards. These standards or prerequisites are needed for an insurer to manage the company in a sound financial manner. Without suitable risks, an insurance company can find itself in serious financial trouble. An insurance company is subject to the same problems as any other business—inadequate capitalization, a weak investment portfolio, or poor management. Insurance companies have the additional problem of insuring risks that could result in catastrophic losses.

The following is a list of the characteristics of a risk that are desired in order for it to be considered an "insurable risk":

1.  There should be a large number of homogeneous risks (exposure units).

2.  The loss should be verifiable and measurable.

3.  The loss should not be catastrophic in nature.

4.  The chance of loss should be subject to calculation.

5.  The premium should be reasonable or economically feasible.

6.  The loss should be accidental from the standpoint of the insured.

It should be noted that this list is what is considered ideal from the standpoint of the insurance company. Most risks are not perfect in all aspects, and insurance companies have to weigh all aspects of a risk to determine if, overall, it meets the criteria of an insurable risk.

Large Number of Homogeneous Risks

The insurance company must be able to calculate the number of losses it will incur from the total number of risks it insures. Assume that a life insurance company has just been formed and it is to insure its first two people. Each wants $100,000 of life insurance. The company needs to know what the chance of dying for each of the two people is in order to calculate a premium. Without this information, the company will have no idea of whether these people will live or die during the policy period. Should both die during this period, $200,000 would be needed for the claims. If neither dies, the company would need nothing for the claims. The conclusion one reaches is that the premium should be somewhere between $0 and $200,000. This information is not very helpful, and the insurance company could not insure the risk. What is needed is a large number of similar risks so statistics can be developed to determine an accurate probability of loss for each risk being evaluated. Insurance is based on the law of large numbers, which means that, the greater the number of exposures, the more closely the actual results will approach the probable results that are expected from an infinite number of exposures. For example, life insurance companies have accumulated information over the years that enables them to develop mortality tables that reflect the expected mortality for a given type of risk. They are able to do this because of the large number of lives that have been insured over the years. Medical, dental, disability, and life risks all require large numbers of cases to determine proper premium rates.

Employee benefit plans may or may not have the numbers needed to determine loss expectations accurately. This would depend upon the specific plan. Those plans with large numbers of homogeneous risks can be experience rated. This means the premiums will be calculated with the data from the plan experience itself. Smaller plans would not have an adequate number of risks, and other alternatives would be needed. For example, small plans can be combined with other small plans to get creditable statistics, or insurance companies might ignore small-plan statistics and rely on loss statistics developed independently of the plan.

Loss Should Be Verifiable and Measurable

It is important that an insurance company be able to verify a loss and to determine the financial loss involved. Certain risks pose no problem in determining if a loss has taken place. Examples would be fire and windstorm losses with a home or a collision loss with one's auto. Furthermore, the financial value of these losses can be determined accurately by the use of appraisals and other forms of valuation. Other risks are harder to evaluate. An example is a claim for theft of money from a home. Did the theft take place? Did the person have any money at home to be stolen? With risks that are difficult to evaluate, the insurance company has to take other precautions to protect itself from false and inflated claims.

Employee benefits are subject to the same types of problems. Death claims and retirement benefit claims probably would be the easiest in which to determine whether a loss has taken place or not. Once a death claim is verified, the amount of loss is normally the face value of the insurance contract. Few problems result from death claims. The same is true of retirement benefits. Assuming the age of the retiree can be verified, then the benefit promised by the plan will be paid. The other extreme might be disability income claims. In some situations, an insurer might be uncertain whether a valid claim exists or not. Some disability losses, such as back injuries, are very difficult to determine. Is the insured actually disabled or not? Still other employee benefit losses may fall between these two extremes. Medical and dental losses might fall into this category. When an employee benefit loss is difficult to verify or measure, the insurer may attempt to overcome the problem through several methods. Policy provisions are helpful in such situations. Benefit maximums, waiting periods, preexisting conditions clauses, alternate medical verification, required second opinion on certain surgical procedures, and hospital-stay monitoring are a few of the provisions that help in these situations.

Loss Should Not Be Catastrophic in Nature

A serious problem occurs when a large percentage of the risks insured can be lost from the same event. Assume a fire insurance company insured all of its risks in one geographical location. A serious fire could result in catastrophic losses to the company. This did happen in the early history of fire insurance. Fires in London, Chicago, Baltimore, and San Francisco resulted in insurance company bankruptcies and loss of confidence in the industry. It became obvious that a geographic spread of the risks insured was essential, because a concentration of losses from one event could seriously impair or even bankrupt a company. Cases exist in which it is almost impossible to obtain a spread of the risks. In such cases, insurance becomes difficult or impossible to obtain. Flood and unemployment losses would be examples. Unemployment can cover wide geographic areas, and a geographic spread would not help prevent a catastrophic loss. The same could be true for flood losses. The federal or state government might insure this type of risk, but it would be necessary for it to subsidize the premium rates to make them affordable.

Employee benefits are seldom subject to problems relating to inability to get a geographic spread of the risk. Benefit plans often insure life risks, hospital and dental risks, and disability income losses. For the most part, these types of risks are not subject to catastrophic loss due to geographic location, but examples can be imagined in which catastrophic losses might exist. The possibility of a plant explosion or a poison gas leak causing a large number of deaths or medical losses, or a concentration of certain diseases because of the exposure to certain elements that are indigenous to a specific employee group theoretically exist. Usually, however, this is not an important consideration in underwriting typical benefit plans. Policy limitations, reinsurance, and restrictions on groups insured all can be used to minimize the problem to the extent it exists.

Chance of Loss Should Be Subject to Calculation

For an insurance company to be able to calculate a premium that is reasonable to the insured and that represents the losses of a particular risk, certain information is essential. Data on both the frequency of losses and the severity of the losses must be available to determine the loss portion of the premium. This often is referred to as the pure premium portion of the premium. Essential to the pure premium calculation would be a large number of homogeneous exposure units as previously discussed. If an employer is large enough, the plan losses alone could be used to determine the pure premium portion. The meaning of "large" depends upon the type of risk involved. At least several hundred employees probably would be needed for full reliance upon the data.

Premium Should Be Reasonable or Economically Feasible

For an employee benefit plan to be acceptable to an employer and to employees, the plan must have a premium that is considered reasonable relative to the risk being insured; that is, the insured must be able to pay the premium. An insurance company's expenses not related to the losses covered by the pure premium must be added to that premium to obtain the total premium. The expense portion may be referred to as the loading associated with the risk. The "pure premium" plus the "loading" would make up the total premium to be paid by the plan. Employees who pay a part or all of the premium (participating plan) will not participate if they can obtain a lower premium in an individual insurance plan or if they can be insured through a spouse's plan at a lower cost, and the employer will be unable or unwilling to pay the premium if the rate is not reasonable.

Why would a premium be noncompetitive? This could happen for any number of reasons. For example, a plan could be populated by a high number of older employees. The resulting rate may mean that the younger employees can find lower-cost insurance outside of the plan. The younger employees are unwilling to subsidize the rates for the older employees. Also, the employer may not want to pay the needed premiums. Other reasons for noncompetitive plans could be poor loss experience from a high number of sick and disabled in a plan, or a plan having specific benefits that have resulted in high loss payout. For example, a plan may provide unlimited benefits for drug- or alcohol-related sickness, and the plan member makeup may have resulted in heavy payout for these problems. The bottom line is that the resulting loss experience has made the plan noncompetitive. It is not unusual for an employee group initially to pay a rate that is considered reasonable only to have the plan premiums become unreasonable over time. Failure to keep the average age of the members in the plan low or a higher incidence of illness could be the reason.

The employer must keep track of the factors contributing to premium increases. Inflation related to medical benefits has in recent years resulted in plan costs increasing beyond the regular cost-of-living index. This is particularly true with plans covering prescription drugs. The cost of this coverage has dramatically increased over the past 15–20 years. Constant review of benefits, benefit levels, employees covered by the plan, and competitive rates for alternative plans must take place. It has become common for plans to move away from "first dollar" medical benefits and to incorporate deductibles, waiting periods, and other cost-saving features. An obvious factor to review is the cost of alternative plans. Would it be financially sound to use an alternative insurance plan or an alternative method of delivering the benefits, such as a health maintenance organization (HMO) or a preferred provider organization (PPO)?

Loss Should Be Accidental from the Standpoint of the Insured

This problem can be serious in some forms of insurance, such as property and liability coverage, but is of less importance in the life and health areas of employee benefits. The insurance company does not want to pay for a loss if it is intentionally caused by the insured. It is obvious that payment should not be made if one intentionally destroys his or her home by arson or purposely wrecks an automobile.

An employee could intentionally cause a personal loss, but it would mean causing harm to himself or herself. For example, suicide or attempted suicide could result in death or medical claims. This type of problem can be reduced or eliminated by policy provisions restricting benefits in some manner if it is necessary. Determining whether a loss is accidental normally is not a problem in life, medical, and disability claims.

Insurable Risk Summary

Insurance companies consider providing insurance to employee benefit plans if they meet the minimum standards of an insurable risk. Benefit plans in general fit the minimum standards as set forth above. Such plans would include life insurance, medical and dental insurance, disability income, and retirement programs. Policy provisions, benefit restrictions, and reinsurance can be used to help alleviate problems to the extent they exist. Life insurance probably is the best example of a plan that meets all the desirable standards of an insurable risk. Disability income, although normally insurable, creates more of a problem from an insurability standpoint. Although not a common employee benefit, excess unemployment insurance would be a benefit that borders on being uninsurable.

Handling Adverse Selection

Adverse selection is the phenomenon in the insurance mechanism whereby individuals who have higher-than-average potentially insurable risks "select against" the insurer. That is, those with the greater probabilities of loss, and who therefore need insurance more than the average insured, attempt to obtain the coverage. For example, people who need hospitalization or surgical coverage seek to purchase medical insurance, those who own property subject to possible loss by fire or flood obtain insurance, and individuals who own valuable jewelry or objects of art purchase appropriate coverage. This tendency can result in a disproportionate number of insureds who experience losses that are greater than those anticipated. Thus, the actual losses can be greater than the expected losses. Because adverse selection is of concern to insurers for both individual and group contracts, certain safeguards are used in each case to prevent it from happening.

Under a block of individual insurance contracts, the desirable situation for an insurance company is to have a spread of risks throughout a range of acceptable insureds. The so-called spread ideally will include some risks that are higher and some that are lower than the average risk within the range. Insurers attempt to control adverse selection by the use of sophisticated underwriting methods used to select and classify applicants for insurance and by supportive policy provisions, such as preexisting-conditions clauses in medical expense policies, suicide clauses in life insurance policies, and the exclusion of certain types of losses under homeowners policies.

The management of adverse selection under group insurance contracts necessarily is different from the approach used in individual insurance. Group insurance is based on the group as a unit and, typically, individual insurance eligibility requirements are not used for the group insurance underwriting used in employee benefit plans. As an alternative, the group technique itself is used to control the problem of adverse selection.

Self-Funding/Self-Insurance

Self-funding, or self-insurance, is a common method of providing financing for employee benefit plans. Essentially this means that the organization is retaining the risk. It is important to realize, however, that many of the activities performed by the insurance company under an insured plan still have to be done. The identical problems associated with insurable risks for an insurance company exist for the firm that is self-funding or self-insuring. Therefore, the characteristics of an ideally insurable risk would be just as important for those firms that use self-funding as they are for an insurance company. The mechanism used for funding is not directly related to the question of whether a risk is a good one to include in the benefit plan. One should realize that only large firms with many employees would be able to meet all the characteristics of the ideally insurable risk. It is not uncommon to find that firms that say they self-fund or self-insure have, in fact, some arrangement with an insurance company or companies to insure part or all of a particular benefit. Many firms use insurance to provide backup coverage for catastrophic losses or coverage for losses the firm feels cannot be self-funded. The self-funded or self-insured plan has most of the characteristics found in the definition of insurance and has many of the same problems.

THE PENSION BENEFIT GUARANTY CORPORATION AND ITS PLAN INSURANCE

If an employer encounters financial difficulty and is forced to terminate or curtail a qualified defined-benefit plan, the ultimate payment of plan benefits is often jeopardized. If the plan uses an insurance company contract as the funding medium, the employee's benefit is usually to some extent guaranteed by the insurance company. However, the use of trust funds predominates in defined-benefit plans, and these funds usually involve no insurance company guarantees. Actuarial funding methods assume that plans will be in existence indefinitely. As a result, the plan fund in many cases is, at a given moment, inadequate to fund all of the benefits accrued under the plan if the plan terminates at that moment.

Recognizing this problem, Congress established a scheme of mandatory plan insurance for certain defined-benefit plans as part of ERISA (Title 4) in 1974. The insurance is administered by a quasi-governmental corporation called the Pension Benefit Guaranty Corporation (PBGC). Defined-contribution plans do not involve the same benefit security problems as defined-benefit plans because the participant's accrued benefit is always equal to the participant's account balance. Therefore, the PBGC plan insurance scheme does not apply to defined-contribution ("individual account") plans.

Plans Covered

PBGC coverage can be summarized by stating that, in general, all qualified defined-benefit plans are covered, while individual account (defined-contribution) plans are not covered. With respect to defined-benefit plans, the usual exclusions applicable to ERISA provisions apply: there is no PBGC coverage for federal, state, and local government plans; church plans (unless the plan elects coverage); plans with no employer contributions; plans for highly compensated individuals or substantial owners; plans frozen prior to ERISA; and various other exclusions.

Benefits Insured

The PBGC does not insure or guarantee all benefits provided under a qualified defined-benefit plan covered by PBGC insurance. A distinction is made between basic and nonbasic benefits. The PBGC is required under the terms of its federal charter to insure basic benefits. PBGC is allowed to extend coverage to nonbasic benefits, but it has not yet done so.

There are numerous conditions and limitations on what qualifies as a guaranteed basic benefit, set out in Part 2613 of the PBGC regulations. The most significant limitations are as follows:

• The benefit must be nonforfeitable or vested. This refers to vesting that existed under the terms of the plan immediately prior to plan termination, not to benefits that became vested solely on account of plan termination.

• The benefit must be a "pension benefit"-a benefit payable as an annuity to a retiring or terminating participant or surviving beneficiary, providing a substantially level retirement income to the recipient. Consequently, the PBGC generally does not insure a lump-sum benefit.

• There is a dollar limitation on the amount of monthly payment the PBGC will guarantee. Regardless of the plan provisions, the insured monthly benefit is limited to one-twelfth of the participant's average annual gross income from the employer during the highest paid five consecutive calendar years or lesser number of years of active participation. Furthermore, in no event will the insured benefit exceed a dollar limit, originally $750 monthly in 1974, which is subject to an indexation procedure. For plans terminated in 2000, the limit was $3,221.59 monthly. The dollar limitation applies to a benefit in the form of a straight-life annuity beginning at age 65 and payable monthly. The limit is adjusted actuarially for other forms of benefits.

• The participant must be "entitled" to the benefit as of the date of plan termination. Generally, this means that the recipient must have satisfied the conditions of the plan necessary to establish the right to receive the benefit (other than mere application for it or satisfying a waiting period) prior to the plan termination date. Also, the benefit must be payable to or for the benefit of a natural person (not, for example, a corporation).

PBGC Funding and Premiums

The PBGC has established several funds to provide benefit guarantees. It has the power to borrow up to $100 million from the U.S. Treasury if necessary. However, the PBGC is expected to be self-supporting and is therefore required to charge insurance premiums for its guarantees. For single employer plans, the basic annual premium for 2000 is $19 per participant. For certain underfunded plans, an additional annual premium may be required, depending on the amount of the plan's unfunded vested benefits. Congress has the authority through a joint resolution procedure to review and change PBGC rates from time to time, based on various factors set out in the law. Payment of the premiums is mandatory, and is enforced by various penalties.

Plan Termination Procedures

Reportable Events

The PBGC becomes involved with a plan that is terminating or encountering various difficulties in somewhat complex ways. First of all, the plan administrator is obligated to report to the PBGC certain events that could potentially cause financial difficulty. There is a long list of these reportable events; some significant ones are these:

• An IRS or Department of Labor disqualification of the plan

• A plan amendment decreasing retirement benefits

• A decrease in the number of active participants to less than 80 percent of the number at the beginning of the plan year or 75 percent of the number at the beginning of the previous plan year

• A determination by the IRS that there has been a termination or partial termination of the plan

• A failure to meet the minimum funding standards

• An inability by the plan to pay benefits when due

• Certain large distributions to a substantial owner

• A plan merger, consolidation, or transfer of its assets

• The occurrence of another event indicative of a need to terminate the plan-the regulations refer to such items as insolvency of the employer or a related employer and certain breakups of commonly controlled groups of employers

If the consequences of these reportable events are significant enough, the plan can be involuntarily terminated by the PBGC. Also, of course, a voluntary termination can be carried out by the plan administrator under one of the two procedures described below. In any event, the actual termination of a plan covered by PBGC guarantees is carried out under detailed procedures set out in the law.

Allocation of Plan Assets on Termination

The PBGC termination procedures revolve around the rules for allocation of the assets of a terminated defined-benefit plan under ERISA Section 4044. On termination, such plan assets must be allocated in descending order to the following categories:

• Benefits attributable to voluntary employee contributions.

• Benefits attributable to mandatory employee contributions.

• Annuity benefits attributable to employer contributions that were, or could have been, in "pay status" as of three years prior to termination. A benefit in "pay status" means a benefit being paid to a retired (nonactive) employee. The high priority reflects the fact that such employees are least able to protect themselves against a failure of the plan fund.

• All other PBGC guaranteed benefits.

• All other vested benefits.

• All other plan benefits.

Any amount remaining after these categories may revert to the employer, if the plan so provides.

Voluntary Plan Termination

ERISA Section 4041(a) provides for two types of voluntary termination procedures, the standard termination and the distress termination. A plan is eligible for the standard termination only if assets at the termination date are sufficient to provide for all benefit commitments as of the termination date. A benefit commitment to a participant or beneficiary means all benefits guaranteed by the PBGC as described earlier, but determined without certain limitations, such as the maximum dollar limit or the restriction on benefits in effect for less than 60 months before plan termination. Certain early retirement supplements and plant closing benefits also come within the definition of benefit commitments. If benefit commitments are not met, a voluntary termination must follow the distress termination procedures.

With a standard termination, the plan administrator must provide 60 days advance notice of intent to terminate to participants, beneficiaries, and other affected parties.

The plan administrator must begin distributing plan assets at the end of the 60-day determination period if the PBGC has not issued a notice of noncompliance and if the plan assets are sufficient to meet benefit commitments. The assets are distributed in accordance with the priorities of ERISA Section 4044 described above. Assets must be distributed either through the purchase of annuities from an insurance company to provide plan benefits or in some other manner providing adequate benefit security.

A distress termination is available only if one of three distress criteria is met:

1. Each contributing sponsor of the plan or substantial member of a controlled group sponsoring the plan must be in a liquidation proceeding under federal bankruptcy law or similar state law; or

2. The sponsor must be involved in a reorganization in bankruptcy or an insolvency proceeding; or

3. The plan administrator demonstrates to the PBGC that unless the termination occurs, the sponsor will not be able to pay its debts and will be unable to continue in business, or the cost of providing benefits under the pension plan has become unreasonably burdensome (for example, because of a declining work force).

On a distress termination, the plan administrator must submit to the PBGC information similar to that required under a standard termination, plus information related to the distress criteria. If the PBGC determines that there are sufficient plan assets to fulfill benefit commitments, the plan administrator may begin to distribute the assets in accordance with ERISA Section 4044.

Contingent Liability of Employer

In the event of a plan termination covered by PBGC insurance, the employer must reimburse the PBGC for the PBGC's liability for guaranteed benefits in excess of the plan's assets. However, under ERISA Section 4062, any amount of the employer's liability that exceeds 30 percent of the employer's net worth, can be deferred under "commercially reasonable" terms. This PBGC remedy may be of limited value for large bankrupt employers with no net worth or financial resources.

Multiemployer Plans

The previous discussion of termination procedures applies primarily to single employer plans or plans of controlled groups of employers. The termination problems are somewhat different where contributions to the plan are made by a number of unrelated employers-that is, a multiemployer plan such as a plan adopted under industrywide collective bargaining agreements. For such plans, there are different asset allocation provisions and somewhat different provisions for involuntary termination by the PBGC.

The most significant difference from single employer plans involves the withdrawal liability of an employer that completely or partially withdraws from a multiemployer plan. A sale of the employer's assets in an arm's-length transaction will not be treated as a withdrawal as long as the purchaser of the business continues the plan, the purchaser provides an acceptable surety bond or escrow deposit for five years after the sale, and the seller of the business remains secondarily liable for five years. If an employer withdraws from the plan, the employer's withdrawal liability is an amount based on the withdrawing employer's share of unfunded vested benefits under the plan. The withdrawing employer must pay all or a substantial portion of the withdrawal liability to the plan on a periodic basis over a number of years. The law provides for the PBGC to establish a supplemental fund to reimburse multiemployer plans for any uncollectible employer withdrawal liabilities.

Types of Plans | GROUP LEGAL EXPENSE INSURANCE

The types of group legal expense plans vary significantly in the ways they provide legal services. When an employer or negotiated trusteeship establishes a group legal expense plan, benefits can be self-funded or purchased from another organization. These other organizations include state bar associations, groups of attorneys, or other organizations (either profit or nonprofit) formed for this purpose. However, most group legal expense coverage is purchased from a relatively small number of organizations, several of which have recently affiliated with insurance companies.

Existing plans fall into one of three types of arrangements:

1. Referral and discount plans

2. Access plans

3. Comprehensive plans

Referral and Discount Plans

The most basic form of legal expense plan is one that involves referrals and discounts. Plan members are referred to an attorney who provides services based on a fee schedule or at a discount from his or her usual fees, but the attorney's charges are paid by the plan member. In some cases, plan members may be eligible to be referred to attorneys who provide free services, such as a clinic for low-income persons or an attorney hotline of a local bar association.

Access Plans

This form of legal expense plan, sometimes also called a telephone access plan, provides plan members with unlimited legal consultation over the telephone for most legal matters. The plan may also provide simple legal services, such as the preparation of wills or powers of attorney or the review of legal documents.

Plan members are referred to an attorney for more complex legal matters. The attorney will often provide an initial free consultation (usually either one-half or one hour), after which the attorney will bill at some discount (often 25 percent) from normal fees. A plan member is responsible for paying this discounted fee.

Access plans can often be provided at a cost of $5 to $10 per month per member.

Comprehensive Plans

Most legal expense plans can be categorized as comprehensive plans, and premiums usually fall in the range of $10 to $20 per month per member, depending on the level of services provided.

In addition to telephone consultation, comprehensive plans cover in-office and trial work of attorneys. The term comprehensive may be a slight misnomer because most plans are not designed to cover 100 percent of a member's potential legal services; 80 to 90 percent is probably a better figure.

Comprehensive plans usually contain a list of covered services. While there are significant variations among plans, most cover at least the following:

• Unlimited legal advice by telephone

• Document review and preparation

• Name changes

• Adoptions

• Purchase or sale of primary residences

• Eviction defense

• Civil actions

• Driver's license suspension

• Juvenile court proceedings

• Consumer protection

• Bankruptcy

• IRS audits

• Debt collection

• Child custody and support

• Divorce, but possibly only for the covered employee and not dependents

If a particular legal service that is required is not on the list of covered services, there may be some limited coverage as long as the service is not otherwise excluded. This limited service, for example, may be in the form of telephone consultation or a limited amount of work by the attorney, such as two to four hours per family per year.

Legal expense plans have exclusions, and common exclusions include the following:

• Business activities or transactions

• Preparation of tax returns

• Class-action suits

• Actions involving the legal expense plan

• Actions involving the employer

• Actions involving the union that bargained for the coverage

• Cases that have contingent fees

Comprehensive plans take three approaches to the method by which a plan member may select an attorney. Many plans use a closed-panel approach, under which a panel of attorneys has agreed to provide covered services at a predetermined fee or hourly rate for which they bill the plan. The plan member selects the attorney, and benefits are generally available at little or no additional cost. However, plans may limit some benefits to a scheduled maximum (such as $500) and usage limitation (such as four hours). A few plans also have deductibles and copayments.

Other plans are open-panel. A plan member can choose any licensed attorney; however, plan benefits are usually subject to scheduled dollar maximums.

Many plans are modified-panel plans. Under such plans, a plan member may choose either a panel attorney, as in a closed-panel plan, or select his or her own attorney. The election of a panel attorney often results in benefits being paid in full, while the election of a nonpanel attorney results in the use of benefit maximums.