28 The Self-Insurer | www.sipconline.net

Benefits Captives are

to Meet Ever Changing Needs

Written by Karrie Hyatt

Growing & Expanding

With two high-profi le companies getting approved by the DOL to

offer employee benefi ts since 2013,

employee benefi ts captives are getting

more and more attention.

In 2012, after the Department

of Labor suspended captives

pursuing employee benefits

from its EXPRO program, the

program is once again applicable

to captive reinsurers following

the high-profile exemptions

received by the Coca-Cola

Company and Intel Corporation. As

employee benefit programs become

more costly, larger companies are

seeking to obtain more control over

the programs in an effort to reduce

cost and increase efficiency.

November 2015 | The Self-Insurer 29

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Employee benefits are non-wage compensation that employees receive as part of their employment agreements. The basic benefits, many of which are mandated by law, are things like sick leave and vacation days, workers compensation and health insurance. Other benefits are things like life-insurance, dental coverage, disability and retirement packages (pension, life insurance and health insurance).

Since 1974, employee benefits have fallen under the regulation of the U.S. Department of Labor (DOL) after the Employee Retirement Income Security Act (ERISA) became law. ERISA was created to set standards and monitor pension and health plans voluntarily set up by companies for their employees. In the 1960s, after several corporate bankruptcies left employees without their pensions, Congress enacted ERISA to contravene labor racketeering, theft and employer bankruptcy that harmed employees.

ERISA does not apply to some employee benefits offered by companies, such as workers’ compensation or medical stop-loss. However, ERISA applies to many of the most popularly offered benefits. The primary benefits that companies are interested in reinsuring through their captives have been group life insurance and long-term disability insurance. These are considered under ERISA to be prohibited transactions, so in order to set up the reinsurance of employee benefits through a captive, the parent company must seek a prohibited transaction exemption directly from the DOL.

Prohibited Transaction Exemptions and the DOL’s EXPRO

Companies became interested in adding employee benefits to their captives beginning in the late 1990s

and began working with the DOL to seek individual exemptions. One of the first major companies to get an individual exemption was Columbia Energy Group in the year 2000. In 2003, Archers Daniel Midland (ADM) received approval for a prohibited transaction exemption (PTE) for their captive Agrinational Insurance Company. This triggered the DOL’s EXPRO program for this type of transaction.

EXPRO is a program run by the DOL that expedites the approval process for PTEs. Individual exemptions can take upwards of six months or longer to get approval. Using EXPRO, companies can shorten the process to no longer than two and half months. In order to get PTE approval under EXPRO, a company must base their application on two substantially similar individual exemptions within a five year period or one substantially similar individual exemption within ten years and one substantially similar exemption authorized by EXPRO within the previous five years. Since 2003, most companies applying for PTEs have gone through EXPRO, but there are still some that seek individual exemptions.

In late 2012, the DOL suspended the EXPRO program for captive reinsurers. According to Peter Bandarenko, head of New Market Development and senior consultant for Spring Consulting Group, LLC, “There was a normal sunset provision built into it. [At the time] there was an emphasis to reevaluate the requirements. The one area that gained scrutiny was benefit enhancements. They wanted to make sure that if a captive was adding employee benefits it was truly an enhancement to all employees.”

In 2014, the DOL reinstated EXPRO for captive insurers, based on exemptions approved for Coca-Cola and Intel. The DOL did not add any

new requirements to the approval process when it reinstated EXPRO for benefits captives, but, according to insiders, the department is looking for more clarity and details explaining how employees will be benefited by the reinsurance structure.

Who Reinsures Employee Benefi ts Through Captives?

Reinsuring employee benefits so far remains in the realm of larger companies and corporations. There are several reasons for this. The two main employee benefits that companies are reinsuring through their captive are group life insurance and long-term disability. Bandarenko said, “The tried and true benefits that are typically added to captives include the basket of group life insurance and long-term disability and when you are dealing with those two coverage lines it is generally larger companies that will have the premium and plans large enough to be actuarially credible to support inclusion in the captive. So by and large, larger companies favor the idea.”

Another reason is that larger companies are more likely to have both a Human Resources department and a Risk Management department. Since these types of benefits fall under ERISA, it is important that both HR and risk managers work together for compliance. Companies that are large will also have more resources with which to pursue the ERISA exemption, which comes at a cost of time, effort and money.

To even apply for an ERISA exemption with the DOL, a captive has to have been in operation for one year. Companies just launching their captive operations will not have the experience in order to get a PTE. Whereas established captives can make good use of employee benefit

BENEFITS CAPTIVES GROWING | FEATURE

Growing & Expanding

30 The Self-Insurer | www.sipconline.net

reinsurance for their parent companies. For most companies, using their captive to reinsure their employee benefits would not have enough economic advantages to be worthwhile opportunity. For many, it might even cost them more to try and use a captive mechanism for that purpose.

“While adding employee benefits to a captive is becoming a path well-traveled, there are still additional expenses and a complexity to it so it is not a solution for

everyone,” said Bandarenko. “It also requires a unique client where there is strong collaboration between risk management and human resources and one that takes a long term view towards owning and managing their risks. A lot of companies aren’t fully there yet.”

Recent DevelopmentsIn just a little more than ten years,

benefits captives have gone from an unknown quantity to a method used by a growing number of companies. In the early 2000s, there were very few employee benefits plans that were reinsured through captives. A lot of it had to do with the fact that human resources and risk managers were not used to working together. There was also a lot of resistance from insurers to work within this mechanism. However, now that enterprise risk management has become more

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common within larger companies, it has allowed for more collaboration between disparate departments. Captives themselves have become more sophisticated in the last fifteen years, so companies are looking for ways to expand the use of their captive to take advantage of the cost savings associated with them.

“Much of the historical activity around benefits in a captive has been centered around single-parent companies adding group life and disability. This is still the case today,” said Bandarenko. “We are seeing a consistent number of clients expressing interest and requesting feasibility studies being done. On average, we are seeing three to four new clients pursing DOL PTE’s each year. We anticipate this trend to continue into the future. So the growth of employee benefits captives continues to expand at a steady pace.”

While benefits captives falling under the purview of ERISA continue to experience growth, the ones that are growing at the fastest rate are those that are not seeking to reinsure ERISA covered benefits. Medical stop-loss is garnering the most interest.

According to Bandarenko, “When you look at the expansion of other benefits, there has been a recent groundswell of activity, largely being driven by the implementation of the affordable care act (ACA). Small and midsize firms are looking for creative solutions to help them reduce their medical plan costs. The use of captives to fund medical stop loss insurance is an emerging area of focus and expansion within the industry.”

“Another byproduct of the rollout of the ACA is the expansion of the type and scope of voluntary benefits plan sponsors are making available to employees,” added Bandarenko. “In an effort to help employees mitigate

the financial gaps being created by the movement to high deductible health plans, products like group critical illness, group accident, hospital indemnity plans, etc. are being introduced by plan sponsors large and small. This is driving captive owners to again consider expanding use of captives to include these types of voluntary employee benefit plans. This is an emerging area, with lots of recent feasibility study activity and one where we expect to see considerable growth over the next few year.”

While reinsuring employee benefits through captives is not as dynamic in growth in the same way that many other captive coverages are, it has proven to be a strong, steady area of growth for the industry and will likely continue to be as the captive sector becomes more sophisticated in use and management. ■

Karrie Hyatt is a freelance writer who has been involved in the captive industry for more than ten years. More information about her work can be found at: www.karriehyatt.com.