An important issue for employers to be aware of when setting up an employee benefits plan is making sure you have a good understanding of liabilities that could put your business at risk. Benefits liability risk can be a bigger issue than most people think, and there can be serious repercussions from a financial perspective.
Employee benefits liability refers to how likely it is that a company could be sued by an employee due to the administration of its employee benefits plan. While you may think this isn’t necessarily possible, the unfortunate truth is that there are plenty of companies that have experienced liabilities, and it is not a pleasant situation for anyone.
There are multiple examples of Canadian rulings on LTD benefits give a good idea of how liability can lead to serious legal challenges.
At Benavise, we have a checklist that we use with plan administrators to talk through benefits liability risks and give examples of how a business can be exposed to lawsuits related to the company’s benefits plan. Whether your business is big or small, it’s important to talk to your benefits advisor to be clear on your role as a plan administrator so you can prevent liabilities and keep your business protected.
Here are a few examples of situations where it would be important to lower your exposure to liability risks in your employee benefits plan.
1. Late Enrollment Applications
It is common for a plan to have a waiting period when an employee starts to work for a company. So, while the plan administrator and employee may have filled out all the necessary paperwork, an administrator may set the file aside until the waiting period has passed. The risk with this is that if the administrator then forgets to complete enrollment at the appropriate time, the applicant may be subject to declined coverage. As a result, there is potential for a lawsuit in which the employee may require that the company cover fees related to their declined claim.
2. Ignoring Mandatory Enrollment
If a plan requires the mandatory enrollment of all employees in the company, there is a risk for lawsuits in the event that an employee does not enroll for whatever reason. In some cases, an employee may not want to enroll in their company’s benefits plan – perhaps because they already have coverage as a dependent in their spouse’s plan. While it may seem easy to have them sign a waiver to indicate that they do not want to opt into their company’s plan, this may not hold up in court when the plan requires mandatory enrollment.
3. Failure to Report Salary Increases
When an employee’s salary changes, this impacts the value of potential coverage for an employee if they go on long term disability (LTD) leave. As a plan administrator, it’s essential to report salary increases in the plan to be sure that a person would receive the correct amount of coverage. For example, if a plan administrator forgets to update a salary increase, then an employee on LTD would receive less than what they should. As a result, this could expose the company to being sued for the remaining value of what the employee should have gotten had their salary increase been properly reported.
How to prevent benefits liability risk
Awareness of potential liabilities in an employee benefits plan is incredibly important to avoid exposure to lawsuits. Plan administrators can check with their property and casualty insurance provider to find out if they offer employee benefits liability coverage. Being aware of and proactively working to avoid liability is your first line of defence. An employee benefits advisor who specializes in benefits should assist plan administrators with education, training and prevention of liability situations from happening.
If you’d like to understand more about employee benefits liability or want to discuss the checklist that we use with plan administrators, get in touch with us today.