BILL ANALYSIS
AB 2778
Page 1
Date of Hearing: May 5, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 2778 (Committee on Insurance) - As Amended: April 29, 2010
SUBJECT : Disability insurance: voluntary plans
SUMMARY : Authorizes the Director of the Employment Development
Department (EDD) to approve a single voluntary plan of
disability insurance for multiple small employers. Specifically,
this bill :
1)Expresses the following findings and declarations:
a) Employees of small businesses have not had the same
access to the superior benefits of voluntary plan
disability insurance 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 operating requirements of current law and
agency procedures;
c) Lowering the administrative costs of compliance with
California's laws will reduce the competitive disincentive
to follow the law, and assist in the fight against the
underground economy.
2)Authorizes 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 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
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employer to pay the disability benefits, the EDD Director
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. These financial securities
shall be in the amount determined by the Director and in
accord with existing law.
d) The plan will be in effect for at least one year and,
thereafter, continuously unless the EDD Director finds that
the SBTPA, the employer, or a majority of the employees
have given notice of withdrawal from the plan.
e) The rights afforded to the covered employees are greater
than those provided for employees covered by SDI benefits
and Paid Family Leave.
f) 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.
g) If the plan provides for insurance, the form of the
insurance policies to be issued has been approved by the
Insurance Commissioner and is to be issued by an admitted
disability insurer.
h) 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)Defines a "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
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California domiciled clients through an affiliated
California domiciled insurance company.
4)Requires EDD to adopt any application forms and procedures
within 60 days of the enactment of this bill.
5)Provides that any existing voluntary plan which has received a
conditional letter of approval from EDD after January 1, 2009,
and is administered by an applicant which can be deemed an
SBTPA, shall be automatically deemed to constitute a voluntary
plan.
6)Declares the intent of the Legislature in enacting the
financial security requirements noted in #2(c), above, 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.
7)Sunsets on December 31, 2015.
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.
c) A majority of the employees and the employer have
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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.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose . The purpose of this bill is to authorize voluntary
plans of disability insurance in which a third party
administrator may serve numerous small employers and provide
enhanced disability insurance benefits to their employees.
2)Background . In California, state mandated disability
insurance can be made available to employees in two ways.
First, employers may cover their employees with SDI benefits
which are funded by employee contributions and administered by
EDD. Second, employers can establish a "voluntary plan" as an
alternative to SDI if it offers better benefits. Voluntary
plans of disability insurance are also funded by employee
contributions. EDD has the authority to approve new voluntary
plans of disability insurance, and has ongoing oversight
responsibility.
Voluntary disability plans are a mechanism for obtaining
superior benefits to employees injured as a result of
non-occupational reasons for the same or lower premium than
collected for SDI. At the present time, the employers who
make primary use of the voluntary disability plans are large
employers. This is due in part to the various administrative
steps and financial security requirements that must be met
prior to gaining approval from EDD.
3)Argument in support . One company, Applied Underwriters, Inc.,
a Berkshire Hathaway Inc. company, has found that that there
is no mechanism for submitting a single application for 1,600
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nearly identical voluntary disability plans. This company
also notes that EDD processes an average of 400 voluntary plan
applications each year, and that their submittal of these
plans would constitute a 400 percent increase in application
volume. Additionally, after the approval period, EDD would be
tasked with overseeing 1,600 separate voluntary plans.
Applied Underwriters states that allowing one application to
cover multiple small employers allows small employers to
provide superior disability insurance benefits to their
employees, in a manner similar to that provided by larger
employers. This bill does not substantially alter existing
law with regard to regulatory oversight and financial security
protections.
4)Deemed approved plans . This bill would deem approved a
voluntary plan if it has received a conditional letter of
approval from EDD after January 1, 2009, and is administered
by an applicant which can be deemed an SBTPA. Insufficient
information has been obtained to date to establish this grant
of authority. It is recommended that this provision of the
bill be deleted at this time.
REGISTERED SUPPORT / OPPOSITION :
Support
Applied Underwriters, Inc.
Opposition
None received.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086