Implementing a vesting period in a long-term care plan is an important element in a true group long-term care plan, and it allows the employer to retain and reward the most valuable employees while keeping the cost of the program reasonable. This involves some important considerations regarding contributions and benefits in the event an employee leaves the job or retires before (or after) being fully vested as well as the impact this has on the benefit level and adverse selection.
After starting coverage yet prior to being vested in the plan, for which benefits is a participant eligible?
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If someone separates employment before they have become vested, the plan could be designed to allow that person to continue coverage at a reduced level. For example, if the total benefit provided by the policy is $200 per day and the employee pays one-half of the total required contribution, then after separation, they would be eligible to have a $100 per day policy if they continued paying the same amount of contribution after leaving employment.
Another option would be to automatically refund the employee contributions with some possible adjustments. Ultimately, the plan should be designed to provide either a reduced benefit or the return of premium upon termination prior to being vested, but not a choice. To provide separating employees with both options could lead to adverse selection, wherein exiting employees who choose to remain in the plan might actually be more likely to need long-term care benefits than the average employee and thus be more expensive.
Once an employee is vested, what happens if the employee leaves employment before retirement age?
It’s helpful to think of the employee’s account in two pieces: employee’s piece and employer’s piece of the total contributions. Because the employee separated employment prior to retirement age, the employer piece is not fully funded and the employer will not finish funding it. Employee contributions always belong to the people who made them, but they cannot take the vested, accumulated contributions as cash. In order to fulfill the purposes of the benefits and to minimize adverse selection, those accumulated contributions remain in the fund to pay for long-term care. In each piece of the account, a vested participant should be able to take the value of the account as a reduced benefit. In practice, there are three options of handling this situation:
An alternative to the above choices is to require ongoing employee contributions in order to receive the employee portion, while allowing a reduced paid up benefit for the employer portion.
With either choice, the plan may experience adverse selection by those separating employment, and the employee contribution choices provided have to be carefully considered. While some adverse selection is unavoidable because employees have more knowledge of their health status than anyone else, it can be minimized to a manageable level through careful benefit design.
Once vested, what contributions are required after retirement?
Upon reaching retirement age, the employer piece of the benefit will have been fully funded. Therefore, the retirees only need to choose whether to continue their own contributions (if payment period is beyond retirement age). If they do, the full benefit will be available. Otherwise, the benefit is only reduced for the missing retiree contributions.
Why is true group long-term care so important?
- Many Americans will have no way to pay for long-term care services when they are needed.
- Insurance for long-term care will not become widespread if only available on an individual basis, which means that the change will need to come first from employers.
- Group coverage needs to include employer contributions to make it affordable to employees and vesting to make it affordable to employers.