What is accidental death and dismemberment insurance?
Many companies provide their employees with accident benefits, often in the form of accidental death and dismemberment (AD& D) policies or business travel insurance. Typically, these policies pay cash benefits to employees who suffer accidental dismemberment or to the beneficiaries of these employees if the employees die in an accident. The entire principal amount is usually paid in the case of an accidental death, with lesser amounts paid for dismemberment.
AD&D policies pay cash benefits to employees or their beneficiaries based on the "principal amount" of the policy and reduced benefits for lesser injuries. These benefits are usually based on a schedule of benefits.
Most AD&D plans impose restrictions on benefits, such as time limits on losses, limits on the size of multiple injury benefits (to avoid duplication of benefits), evidence of death or injury (to help establish the accidental nature of the accident), and definitions on loss of limb.
AD&D and insurance carriers. Accident plans are usually provided through insurance carriers. The most common types of plans are:
- accidental death and dismemberment;
- business travel insurance;
- group car insurance;
- short-term and long-term disability; and
- workers' compensation insurance.
How does AD&D insurance work?
Accidental death and dismemberment policies (AD&D) pay cash benefits to employees who suffer dismemberments (such as the loss of limbs or eyes) and to beneficiaries of employees who are killed in accidents. Traditionally, AD&D policies were offered as part of group-term life insurance coverage. Today, however, AD&D benefits are increasingly being offered as a choice under cafeteria plans (see 42,310).
Impact of ERISA. Most employer-sponsored AD&D plans are subject to ERISA. This means that these plans are subject to ERISA's reporting and disclosure requirements (see 40,260, as well as ERISA rules governing fiduciaries and participants' claim for benefits. If the plan is contributory, it is subject to ERISA's plan asset rules as well.
Impact of COBRA. However, AD&D policies are not subject to COBRA.
Health care portability rules. Employer-provided AD&D policies are not subject to the health care portability rules.
AD&D benefits. In general, AD&D policies pay cash benefits to employees or their beneficiaries based on the "principal amount" of the policy, i.e., the largest amount the plan will pay. Usually, the principal amount is the amount the plan pays to an employee's beneficiary if the employee dies from a covered accident. Many AD&D plans also pay the principal amount for multiple losses, such as both hands or both feet.
AD&D policies typically pay reduced benefits (a percentage of the principal amount) for lesser injuries, such as the loss of only one hand or one foot. These benefits are usually based on a schedule of benefits.
Where the AD&D policy is packaged with a life insurance policy and an accidental death occurs, benefits under the AD&D policy generally are paid in addition to the benefit under the regular life insurance policy.
Under many AD&D policies, an additional benefit is paid if the deceased employee had been riding in a car while wearing a properly fastened seat belt.
Benefit restrictions. In general, most AD&D plans impose restrictions on benefits, such as time limits on losses, limits on the size of multiple injury benefits (to avoid duplication of benefits), evidence of death or injury (to help establish the accidental nature of the accident), and definitions on loss of limb.
Example: A company's AD&D policy pays 75% of the principal amount for the loss of either arm. The policy also pays 75% of the principal amount for the loss of either leg. However, the policy also has a multiple injury limitation. As a result, if an employee loses one arm and one leg in an accident, the policy would pay 100% of the principal amount (not 150% of the principal amount).
Exclusions. Many AD&D plans exclude losses due to mental disease, suicide, infections, and other medical conditions not caused by an accident.
Employers should make sure that their accident insurance policies define the term "accident" narrowly. Disputes over benefit denials often focus on whether or not an accident has occurred and whether a medical condition affected the accidental nature of the death.
On-the-job accidents. AD&D policies often do not cover accidents that occur on the job. On-the-job accidents usually come within state workers' compensation laws (see 49,010). More information on state workers' compensation provisions can be found in State Laws. However, AD&D policies are sometimes written on a so-called "24-hour coverage" basis, which includes work accidents.
What is the tax treatment of AD&D plans?
Any employer contributions to an employer-sponsored accidental death and dismemberment policy are not taxable to employees. In most cases, however, employees pay for their own AD&D premiums. Generally, employees pay for AD&D benefits on an after-tax basis, and as a result, benefits received are not subject to income tax. (Employee contributions may be made with pre-tax dollars if the AD&D insurance is a qualified benefit under a cafeteria plan; see 42,310.)
Note that the while value of group-term life insurance that exceeds $50,000 must be included in employees' income, this rule does not apply to accidental death and dismemberment insurance.
Employer premiums for both the accidental death benefit coverage and the dismemberment coverage are deductible, as long as they are an ordinary and necessary business expense. As with health plans, accident plans must be provided to rank-and-file employees in a nondiscriminatory manner. Generally, the same nondiscrimination rules that apply to health plans also apply to accident plans.
Reprinted with permission. © CCH
What is accidental death and dismemberment insurance? Many companies provide their employees with accident benefits, often in the form of accidental death and dismemberment ...