Despite all the industry chatter and buzz around worksite voluntary benefits, annual growth of worksite sales remains stuck in single digits. Last month, I wrote about the coming explosion in WVB sales that will result from the elimination of the three key breakdown points in the voluntary sales process:
1) Enrollers in the workplace
2) Unfavorable commission splits to enroll the case
3) Payroll deduction of premium
Innovative technology is eliminating payroll deduction as the method of choice for collecting WVB premium, sounding the death knell for payroll deduction. And its creating a huge opportunity for brokers who want to preserve their group medical commissions.
To borrow Churchills phrase about democracy, payroll deduction is the worst form of premium collection except for all the others that have been tried. The only virtue of payroll deduction is that it works imperfectly, but it works. This has ensured the continued use of payroll deduction despite its messy reliance on a third-party the employer and its inherent financial drawbacks for the carrier and broker. Enlisting the employer to collect insurance premiums is problematic but has been necessary until now.
Payroll deduction has multiple shortcomings. It is a key breakdown point for many employers, who balk at providing another payroll slot and/or at the time-consuming list bill reconciliation. These are the so-called soft costs to the employer of a voluntary benefit offering.
While the need for payroll deduction has deterred many employers from offering WVB, the problems associated with billing and reconciliation have soured many more employers that did offer voluntary benefits. Billing problems stemming from payroll deduction of voluntary benefit premiums remain the top reason that employers drop voluntary plans. From employee terminations to an employees ability to cancel a voluntary benefit at any time, WVB billing can be a messy and difficult process prone to errors. These errors can create hassles with employees, the carrier, or both that HR just doesnt need.
Now, as a broker, imagine being on the 13th green about to putt, when your cell phone rings. You recognize the ring tone its your biggest client. Taking the call, you discover that your $35,000 annual medical commission is at risk over a billing problem with an employees $14 biweekly payroll deduction for a voluntary cancer plan. Not good.
Faced with these risks, many brokers and employers refuse to offer voluntary benefits out of fear of the negative experiences around WVB billing.
The new consumer-centric market
The movement of employees to individual health plans is another nail in payroll deductions coffin.
Ive written previously about how the market changes ushered in and accelerated by health care reform and the ACA are moving the employee benefits industry from an employer-centric to a consumer-centric model. The employee is becoming the benefit decision maker. Part of that transition is the coming employer shift to a defined contribution model for financing benefits, further disengaging the employer from the benefits decision-making and payment process.
This rapidly developing consumer-centric reality poses a serious problem for brokers and carriers around premium collection. As decision-making on benefits shifts to employees, so will the responsibility for payment of premium. Payroll deduction will become less feasible as some employees begin buying individual health insurance on the public exchanges or off exchange. Moreover, the employer is prohibited by law from payroll deducting premium payments for employees receiving a taxpayer subsidy. HR quickly will recognize that payroll deduction is one burden they can eliminate from their overworked and understaffed department. But carriers and brokers still need the payment stability and certainty of policyholders paying premiums out of their paycheck.
Perhaps more important, payroll deduction poses problems for benefit firms beyond the risk to the BOR. Payroll deduction can cause inconsistent commission payments due to the often-unreliable timing of premium payment to the carrier. As a third-party process where the employer must facilitate the employee policyholders payment to the carrier, payroll deduction can have a negative impact on agency cash flow. Payment timing is unstable and unpredictable, dependent on the punctuality and sometimes the cash flow situation of the employer, which can create cash flow problems for the agency.
The soft costs to the employer, inevitable billing problems, and uncertain commission payment timing make payroll deduction a very imperfect method of premium collection.
Direct deposit with a twist
A new premium-collection method known as premium direct deposit allows a benefit firm to end its reliance on employers for premium collection and at the same time eliminate all the work for employers related to payroll deduction. Premium direct depositremoves the employer completely from the premium collection equation and creates a reliable, direct financial relationship between the carrier and the insured employee.
As the name indicates, premium direct deposit replaces payroll deduction of the premium with direct deposit. Unlike consolidated billing, however, PDD doesnt deposit the employee premiums into a single bank account. The unique aspect of PDDthat revolutionizes premium collection is that it provides a virtual insurance account to each employee who buys a voluntary benefit. This virtual insurance accountis a FDIC-insured bank account created for the sole purpose of collecting the employees premium payment(s). Because this virtual bank account belongs to the employee, premium direct deposit of the WVB premium is no different than direct deposit of an employees payroll contribution into his 401(k) account. This makes PDD ideal for voluntary benefit cases where there is no relationship with the employer to secure payroll deduction, e.g., a union with multiple employers.
Unlike the regular checking or savings accounts from which ACH draws, the virtual insurance accountsused with premium direct depositare created specifically and exclusively for premium collection and are not accessible by the employee. Unlike with ACH, the premium funds will always be available to be swept into the carriers account unless and until the employee either is no longer drawing a paycheck or he ends the direct deposit. For those pay periods when the employee is on leave and without a paycheck, the best premium direct depositsystems provide a backup payment option using the employees checking account or credit card.
Instead of the employer reconciling the monthly list bill, deducting premiums each pay period, and eventually sending those funds monthly to the carrier, premium direct depositrequires just a one-time set up by the employer of a direct deposit of premium for each employee buying WVB.
Each payday, the appropriate portion of each employees premium amount is direct deposited into the employees virtual insurance account. These premiums are swept and deposited into the carriers account like the proverbial clockwork.
Making cash flow predictable
Premium direct depositchanges the premium cash flow game for benefits firms by providing consistent, date-certain payment timing that creates predictable, stable cash flow from WVB commissions. Drawing from the employees paycheck, PDD shares payroll deductions financial stability while freeing the agency from the uncertain commission payment timing and opportunity costs inherent in payroll deduction. This cash flow stability becomes more important as voluntary benefits become an important revenue source for benefit firms.
Finally, premium direct depositimproves premium conservation when a policyholder changes employers. Because a virtual insurance accountbelongs to the employee, when changing jobs the employee simply can request the new employer to establish direct deposit of the premium amount into his virtual insurance account. Because federal law requires employers offering the service to honor employees direct deposit requests, employees usually can continue their premium direct depositwith their new employer.
This ends the current reliance on direct billing when an employee changes employers. And the leading PDD systems allow the broker and the carrier to communicate directly with the employee during a job change to encourage retention of the voluntary policies.
Solving brokers biggest problem
BenefitVault, a leading premium direct deposit vendor, is helping innovative brokers preserve the commission revenue from their group health plans, their top concern today. To monetize groups that end their employer-sponsored plans, brokers are embracing the defined contribution method of financing benefits that moves employees to individual health plans. The broker gets paid commission by enrolling the individual plans along with supplemental voluntary benefits. Although most of these employers will no longer payroll deduct premiums, BenefitVaults premium direct deposit system allows these individual health premiums as well as the voluntary to be paid directly from the insureds paycheck, retaining the stability and reliability of payroll deduction while eliminating all the work and hassle of traditional payroll deduction for the employer. Even health insurance carriers are beginning to utilize BenefitVault for premium collection on individual health plans, joining voluntary benefit carriers in discovering the game-changing advantage premium direct deposit offers.
Premium direct depositrepresents a dramatic improvement for employers. Ittotally eliminates the employers workload and potential billing problems related to payroll deduction and frees the employer of any financial involvement in the WVB.
For brokers, PDD removes any risk to the BOR from billing problems with the voluntary and ensures a stable and reliable commission payment schedule.
By eliminating payroll deduction of premium as a key breakdown point, premium direct deposit makes WVB more acceptable to those employers and brokers who currently reject voluntary because of payroll deduction, moving the industry ever closer to realizing its full growth potential.
Eliminating payroll deduction certainly moves the industry closer to a sales explosion for worksite voluntary benefits but the two biggest breakdown points remain: enrollers in the workplace and the huge haircut brokers take on WVB commissions due to enrollment costs.
Next months column will discuss the technological breakthrough that allows an agency to replace the risks and uncertainty of one-on-one worksite enrollment with consistent and superior benefit communication, high participation, and strong premium production in an online self-service environment. And how this technology can double the brokers net commission from a typical voluntary benefits case.
Griswold, an EBA columnist, is an agency growth consultant and author of DO or DIE: Reinventing Your Benefits Agency for Post-Reform Success. His Agency Growth Mastermind Network helps agency leaders reform-proof their firm. Reach him at (615) 656-5974, email@example.com or through 21stCenturyAgency.com.
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