Ditch the Payroll Deduction for Premium Direct Deposit

Premium direct deposit is an alternative way to collect premiums. Instead of the employer setting up a payroll deduction slot, deducting the premiums and forwarding those premiums to the insurance company, an employee fills out a direct deposit form that is given to the employer. Each paycheck, the amount of the premium direct deposit is forwarded to the insurance company just like a paycheck is.

Premium direct deposit works a little differently behind the scenes than a regular direct deposit does. A normal direct deposit goes into the employees bank account. In the case of a premium direct deposit, the money is deposited in an account created by a third party administrator. Once in the account, the third party administrator sends the money to the insurance company. The third party administrator.

There are few things that are needed to make premium direct deposit work. Let me go through of few of those items.

• Direct deposit slot While most employers are already direct depositing their employees paychecks, employees may already be splitting to multiple accounts. If an employer is limited to two direct deposits slots, and the employee is using both, then it’s not possible to direct deposit any more accounts.
• Third party administrator A third party administrator is needed to manage the premium direct deposit accounts.
• Added administration costs The third party administrator will add additional costs to enrollments that will need to be paid by the employee, the benefits broker or the insurance company.
• Individual products Only products that are offered as individual contracts are best suited for premium direct deposit. Group insurance, since it’s an agreement between the employer and the insurance company, should be payroll deducted if it requires employee contributions. Permanent life insurance is a type of product that would lend itself better to premium direct deposit since the actual contract is between the employee and insurance company.
• Approval from the insurance company If it’s an insurance product, the insurance company will need to ok the collection of premiums via premium direct deposit. Their guarantee issue underwriting offer is contingent on how you set up your case.
• Deductions that stay the same from month to month Premium direct deposit won’t work well if payments vary. A fixed amount per direct deposit is that only needs changed once a year or so is ideal.
• A backup collection method The ability to collect premiums via electronic funds transfer at the same frequency of the employees paycheck as an alternate collection method if the employer will not allow premium direct deposit.

It is easy to see the advantages of premium direct deposit. It reduces the employer’s administration.

Another advantage is that the employee’s deduction is now completely portable. If the employee leaves their employer, they can request the new employer to set up their premium direct deposit out of a completely different employer’s paycheck.

Also, most insurance companies require a certain number of participants to make a bill. This eliminates smaller employers from being prospects. Through premium direct deposit, smaller employers can be pooled into one larger group.

Premium direct deposit would also be a way to work with association, unions or other employers where negotiating a payroll deduction slot is not possible.

Finally, another nice advantage to the premium direct deposit is the fact that it’s an employee choice. While an employer may decided to stop deducting for premiums, premium direct deposit provides some insulation that your deduction may being terminated by the employer.

The main disadvantage with premium direct deposit is the added cost to implement it. A larger employer might also view a sizable number of direct deposit initiated at one time just as they would a payroll deduction even though once it’s initiated it requires little additional maintenance.

Another disadvantage would be that premium direct deposit is still an employee initiated transaction. You’ll need to be proactive in the initial setup of an employee’s premium direct deposit as well as any future adjustments.

As health care cost continue to spiral out of control and downward pressure on wages continues to grow, I think it’s entirely possible that the day may come when employers find a way to get out of the benefit business entirely.

In fact, today there are already some employers who refuse to do any payroll deductions for employees at all. It’s an isolated situation now but as employers and employees can no longer afford health insurance premiums, that minority of employers could grow.

Premium direct deposit would still be available though.

Let me know in the comments if you have any experience with premium direct deposit.