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