The Income Replacement Problem
Group long-term disability (LTD) plans provide excellent coverage for most workers but leave gaps for highly compensated employees (HCEs). This is due to limitations on the amount of base salary covered, and the lack of coverage for bonuses, stock-based compensation and retirement plan contributions, including 401(k) plans. As a result, HCEs often end up with only 30 to 50 percent of their earnings protected, while most broad-based employees achieve more significant income protection. The following chart, which is an example, provides an illustration.
Many HCEs are unaware of this potentially significant loss in earnings should they become disabled.
As another complication, retirement plans stop being funded when a disability occurs. For example, an HCE no longer contributes to the 401(k), and therefore no longer receives the matching company contribution. With a drastically reduced monthly income, it is difficult, if not impossible, to save for retirement. While it can be an uncomfortable topic, and most people do not think it will happen to them, the fact is that disabilities do occur. But HCEs are in this executive position for a reason: Once they understand this risk, they typically want to do something about it.
An Integrated Solution
Combining group LTD coverage with individual disability coverage provides the executive with a solid, well-thought out plan that can solve the gap in coverage. Below is an example:
The individual disability coverage can be acquired on a standalone basis by each executive or as part of a company-sponsored individual policies. The company sponsored policies can be issued on a guaranteed issue basis and at a significant discount, typically 25-30%. Furthermore, the premiums are fixed, and the policies are portable and can’t be cancelled. Depending on the size of your company, these policies could be offered on a voluntary basis and paid for by the employee. In either case, it is well worth the expense as another tool to attract and retain top talent.
The shortfall in income replacement is a real problem for higher income earners should they become disabled. With the recent decrease in corporate tax rates, now would be a great time to explore solving this issue. Corporate-sponsored individual disability programs, when integrated with a group disability program, can protect HCEs from this risk in a cost-efficient manner for the employee and the company, while also providing one more important element in the ongoing desire of the companies to attract and retain key officers.
