BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair AB 2778 (Committee on Insurance) Hearing Date: June 30, 2010 As Amended: May 11, 2010 Fiscal: Yes Urgency: No VOTES: Asm. Floor(05/28/10)63-0/Pass Asm. Appr. (05/19/10)16-0/Pass Asm. Ins. (05/05/10)12-0/Pass SUMMARY Would authorize the Director of the Employment Development Department (EDD) to approve a single voluntary plan of disability insurance for multiple small employers. DIGEST Existing law 1.Allows an employer, and a majority of the employees of an employer, to apply to the Director of the Employment Development Department (EDD) for approval of a voluntary plan for the payment of disability insurance (DI) benefits to the employees.; 2.Requires the Director of EDD to approve a voluntary plan when he or she finds, among other things, that the following conditions exist: a. The rights afforded to the covered employees are greater than those provided for employees covered by State Disability Insurance (SDI) benefits and Paid Family leave; b. The plan has been made available to all of the employees of the employer in this state or the employees of a separate establishment maintained by the employer; AB 2778 (Committee on Insurance), Page 2 c. A majority of the employees and the employer have consented to the plan; d. The plan will be in effect for at least one year; e. The plan will not result in a substantial selection of risks adverse to the state Disability Fund; 3.Provides that disability benefits payable to employees are the liability of an approved voluntary plan; 4.Provides that an employee covered by an approved voluntary plan is not entitled to SDI benefits. This bill 1.Would state findings and declarations as follows: a. Small businesses have not had the same access to the benefits of voluntary plan disability insurance (VPDI) as employees of larger employers; b. This lack of access is due, in part, to the administrative difficulty and expense associated with the application and ongoing operating compliance with current law and Employment Development Department procedures; 2.Would authorize the EDD Director to approve a single voluntary plan for all of the clients of a "small-business-third-party administrator" (hereafter SBTPA), and the clients' employees, when all of the following criteria are met: a. The plan is administered by the SBTPA; b. The plan establishes a master trust account, to be held in a federally insured national bank, that is administered by the SBTPA, but requires each individual employer that is a client of the SBTPA to have a subtrust account that reflects that client's employees' specific plan contributions and is not commingled with any other funds; c. If a plan does not provide for the assumption by an admitted disability insurer of the liability of the employer to pay the disability benefits, the EDD Director AB 2778 (Committee on Insurance), Page 3 shall not approve it unless the employer files with the Director the bond of an admitted surety insurer, deposit of securities approved by the Director, or deposit of an irrevocable letter of credit in an acceptable amount and in compliance with specified law. The Director may require additional security from the SBTPA; d. The single voluntary plan will be in effect for a period of not less than one year and, thereafter, continuously, unless the Director of EDD finds the SBTPA has given notice of withdrawal of the plan. Such notice shall be filed in writing with the Director and effective on the next anniversary of the plan effective date, that is not less than 30 days from the date of the filing of the notice; the plan may be withdrawn on the operative date of any law increasing the benefit amounts provided by Sections 2563 and 2655 or the operative date of any change in the rate of worker contributions as determined by Section 984, if notice of the withdrawal from the plan is transmitted to the Director of Employment Development not less than 30 days prior to the operative date of that law or change. If the plan is not withdrawn on the 30 days' notice because of the enactment of a law increasing benefits or because of a change in the rate of worker contributions as determined by Section 984, the plan shall be amended to conform to that increase or change on the operative date of the increase or change. e. Any individual employer who is a client of the SBTPA, or a majority of that client's employees employed in this state covered by the plan, may also terminate their participation in the plan by giving written notice of withdrawal from the plan to the SBTPA and to the Director not less than 30 days prior to the date of withdrawal. f. The rights afforded to the covered employees are greater than those provided for employees covered by SDI benefits and Paid Family Leave; g. The plan has been available to all of the employees of the employer in this state, and a majority of the employees have consented to the plan; h. If the plan provides for insurance, the form of the insurance policies to be issued has been approved by the AB 2778 (Committee on Insurance), Page 4 Insurance Commissioner and is to be issued by an admitted disability insurer; i. The approval of the plan will not result in a substantial selection of risks adverse to the Disability Fund. SDI benefits are paid from the Disability Fund; 3.Would define "small-business-third-party administrator," or SBTPA, as an applicant that the EDD Director finds meets all of the following criteria: a. The SBTPA administers voluntary disability plans on behalf of its clients pursuant to a written agreement in a form and manner approved by the EDD Director; b. The SBTPA has at least 1,000 California domiciled clients, 80 percent of whom have fewer than 20 employees; c. The SBTPA processes payroll for its California domiciled clients; d. The SBTPA offers workers' compensation insurance to its California domiciled clients through an affiliated California domiciled insurance company; 4.Would require EDD to adopt any application forms and procedures within 60 days of the enactment of this bill; 5.Would declare the intent of the Legislature in enacting the financial security requirements that in the event of the insolvency of an employer-client of the SBTPA, or of the SBTPA, the disability claims against the subaccount of any employer-client arising prior to the date of the insolvency shall be satisfied by first accessing the security of the SBTPA, which may include additional financial security required by the EDD Director, rather than satisfying the claims from the state Disability Fund; 6.Would sunset on December 31, 2014. COMMENTS 1.Purpose of the bill To authorize the Director of the Employment Development Department (EDD) to approve a single AB 2778 (Committee on Insurance), Page 5 voluntary plan of disability insurance for multiple small employers. 2.Background State Disability Insurance (SDI) is a California insurance program run by the Employment Development Department. There are three different SDI plans: a. Most California employees are covered by the State plan; b. Some employers offer Voluntary Disability Plans (VDP) which is the type of plan which AB 2778 addresses. A VDP is a private disability insurance plans that has been approved by the Director of EDD. VDP's are required by law to offer coverage that's at least as good as the State plan and have at least one feature that the State plan doesn't have. It cannot be more expensive than the state plan, and it has to be approved by a majority of employees; c. Additionally, persons who are self-employed or a business owner can get Elective Coverage through SDI, subject to different rules. AB 2778 has been introduced to provide a means for a specially qualified business to become an approved third party administrator for VDP plans so that their efficiencies and superior benefits can be made available to those businesses which want them without the existing bottleneck of the approval process. 3.Support . Applied Underwriters (AU), a Berkshire Hathaway Company which is this bill's sponsor, provides payroll services, broadly-defined, to small businesses. Typically, AU advises the committee it provides payroll services, workers' compensation insurance and a voluntary disability plan (VDP) to firms. 4.Currently, AU has approximately 1,500 - 1,700 small business clients. The average number of employees is approximately 20. It finds that this is a growing m,arket segment, which indicates there is a demand for the specialized services it is able to provide to its clients. 5.AU reports that at this time, it has more than 1,000 Voluntary Disability Plan applications awaiting approval at EDD. AU AB 2778 (Committee on Insurance), Page 6 reports the backlog is such that some of the applications have been pending for over a year. AB 2778 proposes to provide a means for AU, and similarly situated entities) to qualify as VDP third-party administrators for small businesses. AB 2778 retains all substantive provision of VDP law, including the election requirement, better benefits for no additional cost, and the right of any employee to join SDI at anytime. Each employer will have a sub-account in AU's master account. Each sub-account will be bonded, as required by law. Additionally, AU (and other 3rd party administrators) will be required to obtain an additional layer of Financial Assurance. Comingling of accounts, receipts, premiums, etc. is prohibited. 6.AU reports , and the committee has received, no opposition. According to AU, the EDD is not in support and the proponents have no idea how EDD intends to process the backlog of pending applications or new applications. This 1. Opposition None 2. Questions None 3. Suggested Amendments None 4. Prior and Related Legislation None POSITIONS Support Applied Underwriters (AU), a Berkshire Hathaway Company, (Sponsor) Oppose None Consultant: Kenneth Cooley (916) 651-4102