|

Mark the date: October 16, 2018.

|

A few years ago, my friend, Nelson Griswold, wrote an articleentitled, “The death of payroll deduction.”  In thearticle, he talked about how the traditional payroll deductionmodel, complete with a soul-crushing employer billing andreconciliation process, has a shelf life.  It's a messyand complicated process.  As Nelson wrote, “Billingproblems stemming from payroll deduction of voluntary benefitpremiums remain the top reason that employers drop voluntary plans.”  In a recent survey,53 percent of account defections cited “billing issues” as theprimary reason for dropping coverage.

|

Every day, businesses large and small make the decision todiscontinue offering voluntary or enhanced benefits.  Andin a market where 58 percent of all sales are takeover sales, thethread of discontent most employed by agents and broker is tosimply ask the client, “How's your billing situation with yourcurrent provider?”  Talk about opening a can of worms; andcue the competitive takeover.

|

So far, the death of payroll deduction has been a slowmarch.  But on October 16th, the first dominofell.  The first state government (the Commonwealth ofKentucky) communicated their decision to discontinue all payrolldeductions of voluntary benefits, starting in 2019.  Inshort, this is a watershed event in accelerating the death oftraditional payroll deduction.

|

The letter from the state read as follows: “The PayrollDeduction Program for optional employee insurance administered bythe Personnel Cabinet on behalf of Commonwealth of Kentuckyemployees will end effective July 1, 2019 … On July 1, 2019, anyremaining payroll deductions to voluntary optional insurancecompanies will be discontinued.”

|

Imagine the impact on the voluntary industry if this goes viralin the public sector industry.  As with other issues(think legalization of marijuana or collective bargaining), onceone state breaks a barrier; others tend to follow.  Ifgovernments and other public sector entities are looking for areason to get out of the payroll deduction business, they may havejust found it.

|

This has the capacity to spread horizontally andvertically.  Horizontally, other state governments mayfollow suit, maybe a bordering state with close economic ties likeTennessee or West Virginia.  It could also spreadvertically, as counties, municipalities, and school systems inKentucky shed their payroll deduction burdens since the stategovernment sees fit to do so.  In the public sector,budgets are tight and this fits the bill.

|

So, what is the potential impact to the industry? About 25 percent of voluntary and enhanced benefits premium isderived from the public sector.  One carrier that sharesits public sector figures reported that 22 percent of all 2017sales were from this market.  That's realpremium.  Most carriers have dedicated public sectordepartments focusing on this segment of the market — and for goodreason.  In employee terms, the public sector employs 22million people, or 13 percent of the U.S. workingpopulation.  To carriers, this is some of the mostprofitable business around.  Once someone gets a publicsector job, they tend to keep it, which leads to higher persistencyof business (the holy grail of profitability).

|

More and more companies are saying “no” to traditional payrolldeduction.  Like the song from Twisted Sister rings true,“We're not gonna take it anymore!” (sing with me, children of the80s).  What other industry sells a product to a consumer(policyholder) and then asks an intermediary (business owner) toaccept a bill, collect the payments, reconcile the bill, and remitthe payment on time, every month…for free?  Like Nelsonsaid in his article, “payroll deduction is the worst form ofpremium collection, except for all the others.”  But thismethod of premium collection has been necessary, until now.

|

I give credit to Nelson; he saw the future first.  Ashe wrote, “The only virtue of payroll deduction to collectinsurance premiums is that it works. This has ensured carriers'continued use of payroll deduction despite its messy reliance on athird-party — the employer — and its inherent financial drawbacksfor the carrier.  With the new technologies available onthe market, a carrier can end its reliance on employers for premiumcollection and at the same time end for employers the workloadrelated to payroll deduction. These tools removes the employer fromthe premium collection equation and create a reliable, directfinancial relationship between carrier and the insuredemployee.

|

What is the future of payroll deduction?  To eliminatethe monthly billing chores, more governments and private businessesare turning to companies that partner with carriers to providebanking technology to eliminate the employer billing andreconciliation process, while still providing voluntarybenefits.  The time for widespread usage of the directdeposit model has come.  In 2016, 82 percent of Americanswere paid through direct deposit. Why wouldn't you pay yourpremiums through direct deposit directly from your paycheck?

|

So, how does it work?  First, we must explain splitdirect deposit, a payroll system feature that virtually everybusiness utilizes.  It is simply the ability to split anemployee's net paycheck among multiple accounts.  Someemployees split their pay between two checking accounts, or achecking and savings account, or maybe a Christmas club or creditunion account.  You get the idea.  Companies havethe capability to provide a personalized FDIC-insured premiumdeposit account, complete with a unique bank account and routingnumber for each employee policyholder.  Then, that bankaccount number is used to push the premium on a direct depositbasis from the employee's paycheck; no different than a Christmasclub account.  Then, the company accepts the bill from thecarrier, sweeps the policyholder's account, and remits thepremium.  The premium is directly deposited into theemployee's premium deposit account (just like a second checkingaccount) automatically, every time payroll runs.  Theemployer never gets a bill and never holds premium. Problemsolved.

|

Many brokers are weary of offering voluntary benefits due to therisk of losing other lines of business when VB billing issuesarise.  Eric Silverman, Founder of Voluntary Disruption,says, “I am finding more and more brokers and clients resisting thetraditional model of payroll deduction for enhanced benefits.  Brokers don't wantto jeopardize their overall client relationship because a $14.20accident plan billing discrepancy can't get expedientlysolved.  One would assume brokers would place more oftheir business with voluntary carriers that offer a “zero-bill”process for their clients.”

|

With the decision made by the Kentucky state government, theshift from traditional payroll deduction to a direct deposit modeljust got a big shove.  Is this the start of a billingrevolution in the industry?  Thanks to the Bluegrassstate, the floodgates are certainly now open for other employers(public and private sector alike) to make the move they have wantedto make for years.

|

William L. “Tripp” Amos III joined Piedmont as Chairman in2018. He is a member of Aflac's founding family,and has been in the voluntary/worksite business for over 25years.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.