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For the first time since 2012, employers are taking advantage of a fast-track procedure to gain U.S. Department of Labor approval of paying for employee benefits through their captive insurance companies.
Hormel Foods Corp. and Sealed Air Corp. last month submitted expedited captive benefits funding requests to the Labor Department, which handles these applications. Under this approach known as ExPro, regulatory review and final approval can be completed in less than three months.
Labor Department approval is required because captive benefits funding generally is considered a prohibited transaction under the Employee Retirement Income Security Act.
Hormel wants to use its Vermont-based captive to fund life insurance and long-term disability coverage for its employees, while Sealed Air wants to use its captive, also licensed in Vermont, to fund life and accidental death and dismemberment benefits for its employees.
“On the risk side, we saw opportunities to diversify the captive's risk portfolio and achieve favorable long-term financial results,” said Jeff Horner, Hormel's Austin, Minnesota-based risk manager.
Howard Edelstein, Sealed Air's Elmwood Park, New Jersey-based director of risk management, said: “Just as companies can successfully assume a certain level of property/casualty risks, they also can successfully assume a certain level of benefit risks.”
Under ExPro, the Labor Department must act within 45 days of a company request for an exemption of an arrangement that normally would be barred by ERISA. The entire process, including a comment period for plan participants, takes about 2½ months, less than half the time often needed for exemptions that do not qualify for the quick-approval process.
“It no longer is a slow boat to China. Employers know they have time certainty,'' said George O'Donnell, technical director of global risk consulting at Aon Risk Solutions in Somerset, New Jersey, which filed Hormel's application. “The availability of ExPro is a huge advantage in implementing these programs.”
Previously, the expedited process generally was available to captive benefits funding applicants that could cite two substantially similar exemptions approved in the past 10 years, or one similar exemption and one approved through ExPro within the past five years.
In 2012, though, the Labor Department suspended the expedited approval option for captive benefits funding arrangements while reviewing the criteria, and completed that in late 2013.
In the interim, two employers applied for individual exemptions from the Labor Department to fund employee benefits risks via their captives.
The Coca-Cola Co. got approval in March 2013 for an individual exemption to use its South Carolina captive to reinsure group term life insurance and accidental death and dismemberment coverage. Last year, Intel Corp. received approval to reinsure life and accidental death and dismemberment insurance through its Hawaii captive.
Nearly simultaneous with approval of Intel's application, Labor Department officials signaled the return of ExPro and said employers should review Coca-Cola's and Intel's approach before filing their captive benefits funding applications. Hormel and Sealed Air cited the Coca-Cola and Intel strategy in their applications.
While the Labor Department did not add new criteria in restoring the fast-track review process, experts say it did require greater clarity and more detail explaining how participants' benefits would be enhanced with a captive.
Prior to the regulatory review, “You knew you had to enhance participants' benefits. Now you have to be more precise in disclosing the actual improvement,” said Terry Richardson, a principal at PricewaterhouseCoopers L.L.P. in Dallas.
If Hormel's and Sealed Air's benefits captives applications are approved, more employers are certain to follow, experts say.
“There can be cost savings” by funding benefits through a captive, compared with insured overage in the commercial market, said Debbie Liebeskind, a senior actuarial consultant at Towers Watson & Co. in Parsippany, New Jersey.
In fact, a rule of thumb is that employers funding benefits risks through their captives can cut benefits costs by 5% to 15%.
“The savings are there,” said Karin Landry, a managing partner at Boston-based Spring Consulting Group L.L.C., which filed Sealed Air's captive benefits funding application.
Another advantage to adding benefits to a captive's book of business is that it diversifies risks, reducing a captive's exposure to losses if its experience is bad in one line of coverage.
Also, by funding the benefits risks through the captive, the captive earns investment income on those premiums as opposed to “sending out those dollars'' to commercial insurers, Mr. Richardson said.