This month, UnumProvident is introducing a new long-term disability (LTD) product for its large-case market called 401(k) Protection, a separate LTD policy issued to an employer’s 401(k) plan for the benefit of employees participating in the 401(k) plan. The concept is based on a patented business process methodology by Danbury, Connecticut-based Corporate Compensation Plans, Inc. (CCP), which has also offered a product directly to employers, including IBM (see Blue Moves ).
The rationale behind the offering is simple: When employees become disabled for an extended period, contributions to their employer-sponsored retirement plan normally will stop. Additionally, those dependent on disability benefits for their income alone may be unable to save for retirement.
The new 401(k) Protection LTD product is designed as a separate LTD policy issued to the Trustee of the 401(k) plan, rather than the employer. The coverage is based on contributions made to the 401(k) plan in the prior 401(k) plan year, “insurable” contributions that can include:
- employee salary deferrals (pre-tax), including “catch up” contributions,
- employer matching contributions,
- employer “non-matching” contributions, such as profit sharing,
- any combination of these amounts (the employer/plan sponsor selects the level of
coverage offered to the group).
The 401(k) Protection LTD insurance premiums are paid from the 401(k) plan assets whether employer paid, employer/employee paid, or employee pay all. The premiums are paid with pre-tax money, with no imputed income to employees on the value of the premium. When employees contribute to the cost of the coverage in whole or in part, their premiums are paid from the participant’s retirement plan account, rather than through payroll deduction, so there is no reduction in take-home pay.
The 401(k) Protection LTD benefits are paid to the 401(k) plan for the claimant’s benefit, and are considered “investment earnings” – and therefore not taxed until withdrawn from the account. Moreover, as investment earnings, these LTD benefits are not subject to the 401(k) deferral limitations.
Currently, UnumProvident offers the product in Alaska, Arizona, DC, Georgia, Hawaii, Massachusetts, Michigan, and Pennsylvania (the location of the trustee as policyholder is relevant, not the location of the employer, since the policy is issued to the trustee), but also plans to file in Maine, New York, Washington, and other states, as business warrants.
Corporate Compensation Plans (CCP) also has a WealthSecure plan, which continues contributions and accruals to disabled workers’ nonqualified plans (see Insurance Product Continues NonQual Plan for Disabled Workers ).