The first domino has fallen: accelerating the death of payroll deduction

Mark the date: October 16, 2018.

A few years ago, my friend, Nelson Griswold, wrote an article entitled, “The death of payroll deduction.”  In the article, he talked about how the traditional payroll deduction model, complete with a soul-crushing employer billing and reconciliation process, has a shelf life.  It’s a messy and complicated process.  As Nelson wrote, “Billing problems stemming from payroll deduction of voluntary benefit premiums remain the top reason that employers drop voluntary plans.”  In a recent survey, 53 percent of account defections cited “billing issues” as the primary reason for dropping coverage.

Every day, businesses large and small make the decision to discontinue offering voluntary or enhanced benefits.  And in a market where 58 percent of all sales are takeover sales, the thread of discontent most employed by agents and broker is to simply ask the client, “How’s your billing situation with your current provider?”  Talk about opening a can of worms; and cue the competitive takeover.

So far, the death of payroll deduction has been a slow march.  But on October 16^th, the first domino fell.  The first state government (the Commonwealth of Kentucky) communicated their decision to discontinue all payroll deductions of voluntary benefits, starting in 2019.  In short, this is a watershed event in accelerating the death of traditional payroll deduction.

The letter from the state read as follows: “The Payroll Deduction Program for optional employee insurance administered by the Personnel Cabinet on behalf of Commonwealth of Kentucky employees will end effective July 1, 2019 … On July 1, 2019, any remaining payroll deductions to voluntary optional insurance companies will be discontinued.”

Imagine the impact on the voluntary industry if this goes viral in the public sector industry.  As with other issues (think legalization of marijuana or collective bargaining), once one state breaks a barrier; others tend to follow.  If governments and other public sector entities are looking for a reason to get out of the payroll deduction business, they may have just found it.

This has the capacity to spread horizontally and vertically.  Horizontally, other state governments may follow suit, maybe a bordering state with close economic ties like Tennessee or West Virginia.  It could also spread vertically, as counties, municipalities, and school systems in Kentucky shed their payroll deduction burdens since the state government 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 is derived from the public sector.  One carrier that shares its public sector figures reported that 22 percent of all 2017 sales were from this market.  That’s real premium.  Most carriers have dedicated public sector departments focusing on this segment of the market — and for good reason.  In employee terms, the public sector employs 22 million people, or 13 percent of the U.S. working population.  To carriers, this is some of the most profitable business around.  Once someone gets a public sector job, they tend to keep it, which leads to higher persistency of business (the holy grail of profitability).

More and more companies are saying “no” to traditional payroll deduction.  Like the song from Twisted Sister rings true, “We’re not gonna take it anymore!” (sing with me, children of the 80s).  What other industry sells a product to a consumer (policyholder) and then asks an intermediary (business owner) to accept a bill, collect the payments, reconcile the bill, and remit the payment on time, every month…for free?  Like Nelson said in his article, “payroll deduction is the worst form of premium collection, except for all the others.”  But this method of premium collection has been necessary, until now.

I give credit to Nelson; he saw the future first.  As he wrote, “The only virtue of payroll deduction to collect insurance premiums is that it works. This has ensured carriers’ continued use of payroll deduction despite its messy reliance on a third-party — the employer — and its inherent financial drawbacks for the carrier.  With the new technologies available on the market, a carrier can end its reliance on employers for premium collection and at the same time end for employers the workload related to payroll deduction. These tools removes the employer from the premium collection equation and create a reliable, direct financial relationship between carrier and the insured employee.

What is the future of payroll deduction?  To eliminate the monthly billing chores, more governments and private businesses are turning to companies that partner with carriers to provide banking technology to eliminate the employer billing and reconciliation process, while still providing voluntary benefits.  The time for widespread usage of the direct deposit model has come.  In 2016, 82 percent of Americans were paid through direct deposit. Why wouldn’t you pay your premiums through direct deposit directly from your paycheck?

So, how does it work?  First, we must explain split direct deposit, a payroll system feature that virtually every business utilizes.  It is simply the ability to split an employee’s net paycheck among multiple accounts.  Some employees split their pay between two checking accounts, or a checking and savings account, or maybe a Christmas club or credit union account.  You get the idea.  Companies have the capability to provide a personalized FDIC-insured premium deposit account, complete with a unique bank account and routing number for each employee policyholder.  Then, that bank account number is used to push the premium on a direct deposit basis from the employee’s paycheck; no different than a Christmas club account.  Then, the company accepts the bill from the carrier, sweeps the policyholder’s account, and remits the premium.  The premium is directly deposited into the employee’s premium deposit account (just like a second checking account) automatically, every time payroll runs.  The employer never gets a bill and never holds premium. Problem solved.

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

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

William L. “Tripp” Amos III joined Piedmont as Chairman in 2018. He is a member of Aflac’s founding family, and has been in the voluntary/worksite business for over 25 years.