Because the Verizon captive has been able to pile up outside business from other sources, there’s less of an incentive for it to reinsure ERISA-regulated employee benefits. “We’re still trying to get our arms around the added value [besides] getting third-party business,” says Small.
But for other employers, employee benefits might fit the bill for outside business perfectly. Typically, benefits risk is considered to be unrelated since it’s the employee — not the employer — who’s insured. At the same time, the exposure can be a prudent one, since employers are likely to have a fairly firm grasp of the health and mortality risks of their own workers.
Until recently, however, NiSource was the only company able to partake of the advantages of a captive reinsurance arrangement involving benefits. Since 1979, the DOL has banned plan sponsors from buying coverage reinsured by the sponsor’s captive. But in 2000, the department granted an exemption to Columbia Energy Group (which was acquired by NiSource a short time later).
The DOL now appears poised to grant similar permission to Archer Daniels Midland Corp. The proposed ADM exemption has passed unscathed through a comment period, and all that’s lacking is publication in the Federal Register.
If, as expected, the exemption stands, the two exemptions could trigger a fair number of other employers eager to reinsure benefits through captives.
Under a DOL procedure put in place in 1996, if two exemptions judged to be “substantially similar” are granted within five years, an employer can proceed with a transaction in as little as 78 days from the time they apply for an exemption. Usually, it takes more than a year for the DOL to rule on an individual exemption, says attorney Nancy Gerrie, who also works at McDermott, Will & Emery.
Can Cheaper be Better?
Given the potential tax savings, the streamlined review process will likely have a few corporates camped outside the Department of Labor gates. Even with an exemption, however, a captive must satisfy other requirements in order to reinsure benefits. For starters, the captive or a captive branch must be domiciled in an onshore haven like Vermont. For decades, although the number of U.S.-domiciled corporate captives has grown steadily, most have been operating in offshore locals like Bermuda and Cyprus. A captive must also hire an independent fiduciary to vet the reinsurance deal. And the captive may only do business with insurers rated A or better by A.M. Best.
But the biggest hurdle to captives reinsuring their parents’ benefit plans might be the quaint notion that an employer shouldn’t profit at its employees’ expense. To guard against abuses, the DOL requires the captive arrangement to spur an actual increase in benefits in the program’s first year.
For its part, ADM seems to have complied handily with the enhancement requirement. Under the food producer’s plan, Agrinational Insurance Company, ADM’s Vermont-based captive, would reinsure employer-paid and voluntary life insurance benefits provided by Minnesota Life Insurance Company. Among the resulting improvements: salaried employees would see their maximum basic life insurance benefits hiked from $100,000 to $1 million, depending on salary, and get a new accidental death and dismemberment policy.
Convincing the government that a benefits plan has been improved can be a tricky business, however. If a company intends to use a captive to cut benefits spending — and that’s generally the goal — its management will be hard pressed to convince DOL examiners the plan’s been enhanced, says Richard Hamilton, president and general manager of CSX Insurance Company, a Burlington, Vt.-based captive owned by CSX Corporation.
Hamilton should know about the difficulties of getting DOL approval. In 1995, after a draining two-year process, CSX withdrew its application to fund benefits via the captive.