COVID-19: EMPLOYER CONSIDERATIONS ON RISK BENEFIT INSURANCE PREMIUMS AND COVER WHEN REDUCING SALARIES
Further to our newsflashes on:
- the Financial Sector Conduct Authority’s Communication on provisions for the suspension of retirement fund contributions for financially distressed employers that meet the conditions set (available here); and
- the impact of the Council for Medical Schemes Circular on medical scheme contributions by financially distressed employers and employees (available here),
employers must have regard to the impact COVID-19 may have on unapproved risk benefit premiums and cover.
What are unapproved benefits?
Unapproved benefits are those covered under a separate policy of insurance. For example, death benefits are most commonly provided through a group life insurance policy, the employer being the policyholder and responsible for premium payments to the insurer.
Other unapproved benefits include disability, ill-health, disease, income protection and funeral benefits.
‘Unapproved benefits’ must be distinguished from ‘approved benefits’.
What are approved benefits?
Approved benefits are those provided by a retirement fund and may include a policy of insurance between the fund and the insurer to cover death and permanent disability benefits provided by the retirement fund.
The retirement fund is the policyholder and a portion of the contributions paid to the fund is used to cover the risk benefit premium.
The difference between approved and unapproved risk benefits is also important because the tax treatment of these benefits differ.
What should employers consider?
Many employers in financial distress have reduced salaries as well as retirement fund contributions. Where contributions to retirement funds have been reduced or suspended, premiums to cover approved risk benefits should remain intact. Arrangements should be made to ensure that they do remain intact.
Where employers reduce salaries, regard must be had to whether the reduction will impact on other employee benefits, such as unapproved benefits and whether the reduction will impact on the premium payable towards unapproved risk benefits and the cover provided under the insurance policy.
A reduction in salaries is likely to result in reduced cover as cover is usually a factor of an employee’s remuneration. Where cover and premiums are impacted, it is suggested that employers liaise with their respective benefit consultant and/ or broker or directly with the insurer to manage any adverse impact on employees.
Similarly, where no salaries are paid, employers must have regard to the impact thereof on the continuation of risk benefit cover. To the extent possible, given the pandemic, risk insurance policies covering death, disability, income protection, funeral and other benefits are essential to maintain during these unprecedented times.
In this event arrangements should be made to continue paying premiums even if these cannot be deducted from remuneration and to agree for this to be deducted from future salaries as and when they are paid.
If there is any prospect that cover is to be lost, employees must be advised of this in order that they are given the opportunity to make alternative arrangements.
For more information please contact a lawyer in our South African Banking and Financial Services Regulatory Practice.
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