Under Labor Regulations 2510.3-1(B)(2), an employer's self-funded short-term disability plan can be treated as a payroll practice that is not an ERISA welfare benefit plan. One of the requirements is that the amounts must be paid from the employer's general assets. When the employer pays the full cost of the disability payments, this is an easy question. But what if the employer provides a base level of benefit (e.g., 60% of compensation), and permits employees to "buy-up" to a higher benefit (e.g., 80% of compensation)? Are the disability payments still being made from the "employer's general assets," so that the disability benefits are still a payroll practice and not an ERISA welfare benefit plan? The employee contributions are not segregated from the employer's general assets prior to being used to pay benefits.

AMP:

That’s an interesting concept. I’ve managed self-funded STD plans before with no employee buy ups or contributions and agree that if benefits are paid from general assets the plan is not an ERISA plan. I don’t know the answer to your question regarding the treatment of buy-up premiums, but I am curious as to how the buy-up premiums are determined.

Also, how are the buy-up premiums booked from an accounting perspective? At some point, if claims experience is good, does the employer give a refund of the buy-up premiums?

Just curious!!!

Kip,

As the outside legal counsel, I haven't been involved with determining the buy-up cost or how the buy-up premiums are reflected for accounting purposes. But it's my understanding that the employer hasn't collected more in buy-up premiums than it has paid out in increased benefits, so the issue of refunding premiums hasn't come up (yet!).