ERISA Changes Require Care

Posted on February 25, 2011 by Michael Quiat

In the ordinary course of business, many financial planners and attorneys advocate renunciation clauses in wills to alleviate the bite of inheritance taxes. But, they may get bitten themselves if they try to renounce a benefit which is covered by ERISA and they do not follow the procedure necessary to accomplish such a renunciation.

Not that these benefits cannot be renounced under ERISA. They certainly may be. But they must be renounced properly, in accord with the requirements of the ERISA plan under which the benefits are offered to the employee. To fail to obtain prior written approval of the administrator of the ERISA plan to renounce may very well take this estate tax option away from the employee, and thereby wreck the tax advantage sought.

The same holds true for changes in the beneficiary of a life insurance policy issued under the terms of an ERISA plan. Many times the owner of the policy wants to change the beneficiary (divorce, death, etc.) and the advisor tries to do so in a formal legal document setting forth the details. Such an attempt might even be included in a separation or support agreement. But, if the proposed change is not in the form of a qualified QDRO, or it has not been run by the ERISA plan administrator and has not received the plan stamp of approval, there is no guarantee that the renunciation or the beneficiary change will ever go into effect.

Those familiar with ERISA litigation are aware that the most important third party to any transaction involving plan benefits is the plan administrator. The administrator has the “go” “no-go” say on any change which is not permitted by the clear language of the plan.

If there is a dispute, courts generally defer to the decision of the administrator because the administrator is held by law to have discretion in ERISA matters. Even though in a non-ERISA situation, the policyholder would have an absolute right to make a policy change in accord with the terms of the policy, the policyholder can’t take a chance under ERISA. If the ERISA administrator says “no”, it probably will be “no”.

If faced with the problem of trying to alter a benefit of an ERISA plan, you must read the plan documents before determining the action you want to take. If your client does not have the latest copy of the ERISA plan, (the usual situation), obtain one from the Human Resources Department of the employer. You have the right to get one on behalf of your client, the employee.

Read the plan carefully, particularly as it pertains to the action you want to take. If you have to run what you want to do by the administrator, follow the procedure set forth in the ERISA plan documents and make sure your intended change is accepted and acknowledged by the plan. Only then may you feel comfortable that you have effectively accomplished your goal for your client..uman Resources HH


Estate and financial advisers who are aware of this required difference in approach to renunciation and other ERISA plan changes, will most certainly have taken the proper precautions.

Those who are not completely aware should immediately become familiar with the procedures required so their suggested strategies for ERISA clients are approved by the plan administrator.

Otherwise, the best laid plan may turn into a disaster.

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Read It So You Won't Weep

Posted on February 16, 2011 by Michael Quiat

In the business of blogging, we learn to be packrats, hiding away bits of information upon which to base future writings. Many times we forget what we have and are pleasantly surprised when we happen on a tidbit which strikes our fancy.

Contemplating the difficulty of explaining the intricacies of disability insurance law, even to specially educated people such as insurance agents and financial planners, we happened upon “The Illusion of Coverage:”, a comprehensive review of the difficulties of insurance law published by The Access Project www.accessproject.org in 2007.

What we were looking to do was to point out that in today’s world, even when you are in the insurance business, you do not necessarily have your finger on each of the myriad nuances of the various types of insurance coverage because there are so many risks covered in so many ways at so many levels of cost, it seems one would need an encyclopedia just to keep up.

What got us on this topic was a discussion with a financial planner about a particular client and the need for “own occupation” disability coverage because of the nature of the client’s profession and income level. The planner was quick to say that the client had
“own occupation” coverage in his disability income policy.

But, when we asked him, “What kind?” he was at a loss for words.

We then proceeded to list for him the possible limitations and conditions which insurance companies try to place on these policies, such as:

* Limiting the “own occupation” payments to 2 years.
* Precluding the insured from working in any other field as a condition for benefits.
* Capping the amount of benefits to a specific sum over the life of the policy.
* Defining the occupation so as to cover a broad spectrum of employment.

The problem here may be that “own occupation” is frequently used by insurance agents and brokers to describe coverage which is really “modified own occupation”, without understanding or explaining the difference to the policyholder.

The planner and his client may believe that when the insurance agent says the policy has “own occupation” coverage, that such coverage is truly “own occupation” in the classic sense, i.e., if the client can no longer perform the occupation of brain surgery, the insurer will pay the benefit even though the client may be able to do some other type of medical work. Only when the claim is made does the reality of the distinction become clear. By then it is too late.

What the public (and many times their advisers) are not aware of is that insurance, particularly disability income (and long term care) is not nearly one size fits all. Subtle language differences can be critical at the time of claim, but are frequently overlooked or ignored at the time of the policy sale.

So, if one is negotiating such a policy for him or herself, or for a client, to accept a statement that a policy has “own occupation” coverage without plowing through the language of the policy so as to know exactly what one is actually getting, is doing a disservice to yourself and your client.

As with everything else, you get what you pay for. If you want a gold-plated policy which gives exactly the benefit you want for as long as you want, then the premium is going to be high, and if you are willing and able to pay for it – good for you.
If you are not willing or able to pay the required premium, then you have to settle for less protection.

But the important part of this transaction is that both the client and the financial planner know and discuss the details of the policy and make knowing choices based upon a full understanding of the options.

Accepting a generic label for an insurance clause without fully analyzing the actual language leads to a rude awakening if policy payoff time ever comes.

You may miss the true import of a policy clause when you are buying it. But, you can bet your bottom dollar the insurance company won’t miss it when it comes time to pay your claim.
 

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