Wage Loss Replacement Plans: How to Protect High-Income Employees Beyond Group LTD

One of the most common problems I see when reviewing Group Long-Term Disability plans is that the coverage can work very well for the average employee, but not nearly as well for executives and other high-income employees.

Most Group LTD plans provide coverage based on a percentage of income, such as 66.67% of monthly earnings.

Sounds pretty good.

But there is usually another number that matters just as much:

The maximum monthly benefit.

Once someone’s income exceeds what that maximum supports, the percentage of their income being protected starts to fall.

I sometimes refer to this as a form of “reverse discrimination” within the benefit formula. As someone’s income increases, the percentage of their take-home income protected by the plan can actually decrease.

Unfortunately, many employers and employees don’t realize how significant the gap is until someone needs to make a claim.

At that point, it’s too late to fix it for that employee.

Let’s Look at an Example

Assume a Group LTD plan provides:

66.67% of monthly earnings, to a maximum of $4,500 per month.

There is also an 85% all-source maximum.

For simplicity, let’s assume the Group LTD benefit is non-taxable.

An Ontario employee earning approximately $85,000 may have after-tax income of roughly $63,679 per year.

The Group LTD maximum is $4,500 per month, or $54,000 per year.

That means they can protect approximately 85% of their after-tax income.

The plan is working very well.

Now let’s look at an executive earning $350,000.

Their approximate after-tax income is around $203,149 per year.

Their maximum Group LTD benefit?

Still $54,000 per year.

That means only approximately 26.5% of their after-tax income is protected.

	Employee	Executive
Annual Income	$85,000	$350,000
Approx. After-Tax Income	$63,679	$203,149
Maximum Group LTD	$54,000	$54,000
Approx. After-Tax Income Protected	85%	26.5%

 

Same benefits plan. Very different outcome.

And if the Group LTD benefit is taxable, the actual percentage of take-home income being protected can be even lower.

“I Thought I Had 66.67% of My Income Covered”

This is where I see the biggest misunderstanding.

An executive looks at their benefits booklet and sees:

66.67% of monthly earnings.

Naturally, they assume approximately two-thirds of their income would be replaced if they became disabled.

What they may overlook is the next part:

Maximum monthly benefit: $4,500.

I have seen situations where this isn’t fully appreciated until an executive becomes disabled.

The employee is surprised by how little coverage they actually have. HR and management then start looking at whether they can increase the coverage for the rest of the executive team.

Unfortunately, there is very little we can do for the person who is already on claim.

That’s why I think this needs to be reviewed before someone becomes disabled.

Why Not Just Increase the Group LTD Maximum?

That’s the first option I would investigate.

However, the amount of Group LTD available is often influenced by the size and demographics of the group.

A company may have 30 employees but only 4 executives who need significantly higher disability limits. Increasing the overall Group LTD maximum to $10,000, $15,000 or more may not always be available or make sense for the entire workforce.

Some plans also offer Optional LTD, allowing higher-income employees to apply for additional coverage above the Non-Evidence Maximum.

That can help, but Optional LTD may require medical underwriting.

If someone has a significant medical history, they may not qualify.

This is where a Wage Loss Replacement Plan, or WLRP, becomes worth considering.

What Is a Wage Loss Replacement Plan?

A WLRP is an employer-sponsored disability arrangement covering a group of employees.

Rather than relying entirely on the Group LTD contract, the company can establish a plan using individual Disability Insurance policies grouped together under a common arrangement.

Generally, the employer owns and pays for the individual policies, the employees are insured, and disability benefits are paid directly to the employees. A WLRP must cover more than 1 employee. CRA specifically says a single-employee arrangement does not qualify as a WLRP.

In most situations, I wouldn’t look at a WLRP as a replacement for Group LTD.

I would use it to supplement the Group LTD plan.

The Group LTD provides the foundation, while individual Disability Insurance provides additional protection for the executives or high-income employees who need it.

Why Individual Disability Insurance Can Work Well as a Top-Up

Individual Disability Insurance can also provide contractual advantages beyond simply increasing the amount of coverage.

Depending on the product selected, this can include fixed premiums, stronger definitions of disability, partial or residual disability benefits, Cost of Living options and portability if the employee leaves the company. Individual WLRP policies can also provide greater cost stability than traditional group coverage, although Group LTD will generally be less expensive.

That’s why I often like combining the 2 approaches:

Group LTD provides the affordable base coverage, while individual Disability Insurance fills the executive gap.

What Happens if Someone Has Medical History?

With traditional individual underwriting, the insurer may have more flexibility in how it deals with medical history.

Rather than simply approving or declining the additional coverage, it may be possible to make an offer with an exclusion or additional premium.

For example, someone could potentially receive coverage with a back exclusion, a mental health exclusion or a rating due to another medical concern.

An imperfect offer can still be considerably better than having no additional coverage.

There are also programs designed to reduce the amount of traditional medical underwriting required.

This is where GTI and GSI can come into the conversation.

WLRP/GTI: Guaranteed to Issue

RBC’s Guaranteed to Issue, or GTI, WLRP can be particularly valuable for established professionals and executives who need additional coverage above their existing Group LTD.

For eligible employees, the GTI feature provides a defined amount of coverage even if the employee may otherwise have been declined under normal individual underwriting.

The maximum GTI benefit is based on the number of participants:

Participants	Maximum GTI Benefit
2–9	$1,500/month
10–25	$2,500/month
26–49	$5,000/month
50+	$7,500/month

Eligible professionals generally need to have earned at least $100,000 in each of the previous 2 years, have at least 3 years of experience, work full-time at least 30 hours per week, and fall within an eligible occupation.

This can be especially valuable where a key employee has significant medical history and may have difficulty qualifying for additional coverage through traditional underwriting.

GSI: Guarantee Standard Issue

GSI is different.

Under RBC’s current WLRP guidelines, a Guarantee Standard Issue arrangement may be available where 10 or more employees are involved and the average group age is under 50. For higher occupational classes, employees answer a small number of eligibility questions rather than completing the normal full medical underwriting process.

This can make GSI particularly attractive where a company wants to provide consistent individual Disability Insurance across an executive or professional employee class.

However, simplified underwriting does not mean that every possible medical limitation disappears. The actual GSI offer, eligibility questions and policy provisions still need to be reviewed.

This is also why I would be careful about simply having employees apply for Optional LTD first.

If an employer is considering a WLRP, GTI or GSI arrangement, I would first determine what options are available to the group. Simplified programs can have eligibility questions relating to previous insurance history, so the order in which coverage is applied for can matter.

Design the overall program first.

Then determine the appropriate underwriting route.

Why I Often Look at RBC for WLRPs

RBC tends to be one of the carriers I look at closely when we are trying to supplement Group LTD for high-income employees.

One reason is its Combo Limits, which can allow individual Disability Insurance to coordinate with existing Group LTD and potentially provide a higher overall amount of coverage.

This becomes particularly relevant when the existing Group LTD benefit is taxable.

Under a properly structured WLRP, the disability benefit is also generally taxable, so the insurer can issue a larger gross monthly benefit to account for the expected income tax. RBC’s WLRP guidelines specifically provide for increased disability benefit limits to recognize that tax.

The objective isn’t to replace 100% of someone’s gross income.

It’s to determine what they would actually have available to live on after tax and then build an appropriate amount of income protection around that.

The Tax Advantage of a WLRP

The tax treatment is another reason employers consider this structure.

Suppose a company wants to provide an executive with additional Disability Insurance.

One option is to simply increase their salary and have the employee purchase a personally owned policy.

The problem is that the employee purchases that insurance using after-tax dollars.

If the Disability Insurance costs $5,000 per year, the company may need to pay considerably more than $5,000 of additional salary for the employee to have $5,000 remaining after income tax.

With a properly structured WLRP, the employer pays the insurance premium as part of the employee benefit arrangement. Employer contributions toward qualifying periodic WLRP benefits are not treated as a taxable benefit to the employee, while disability benefits received under the employer-funded arrangement are taxable.

In other words:

The employer receives the deduction today, the employee does not have a taxable benefit from the premium, and the disability income becomes taxable if there is eventually a claim.

Because the benefit will be taxable, the amount of coverage can generally be increased to account for that tax.

RBC’s own WLRP comparison illustrates this concept and shows how paying the premium through a WLRP can be less expensive than increasing salary enough for an employee to purchase equivalent coverage personally. The actual savings will depend on the company’s and employee’s tax circumstances.

Don’t Forget About RRSP Contribution Room

There is another benefit that can easily be overlooked.

WLRP disability benefits can constitute earned income for RRSP purposes, allowing the employee to continue generating RRSP contribution room while disabled.

For someone who could potentially remain disabled for several years, that can be meaningful.

Disability planning isn’t only about replacing today’s income. For a high-income executive, we should also think about the potential effect a long-term disability could have on their retirement plan.

Be Careful With Shareholders

A WLRP should be established as an employee benefit, not simply as a way to purchase corporate-paid Disability Insurance for shareholders.

A shareholder can participate, but they should qualify because they are an active employee of the company.

For example, suppose a business owner receives $150,000 of T4 employment income while another $400,000 of profit remains inside the corporation.

For WLRP purposes, the focus is generally on their employment remuneration, not corporate profit attributable to their ownership. RBC’s current guidelines similarly distinguish salary earned as an employee from amounts relating to shareholder status.

If we also need to protect income supported by the profitability of the corporation, a separate personally owned Disability Insurance strategy may be appropriate.

The Employee Class Matters

You also shouldn’t simply select 2 people because those are the 2 people the company wants to insure.

There needs to be a reasonable and identifiable employee class.

That might be executives, senior management, partners who are active employees, employees above a defined salary level, or another legitimate group.

Everyone within that defined class should generally be offered participation on a consistent basis. Different employee classes can also be provided with different levels of coverage, as long as the classifications are reasonable and the plan is structured consistently.

RBC’s WLRP guidelines discuss defining classes based on factors such as position, salary range or benefit entitlement, and caution against arrangements that disproportionately favour shareholder-employees without a logical rationale.

This is one of the reasons I recommend involving the company’s accountant and legal counsel when the plan is being established.

What Income Can Be Used?

Coverage is generally based on employment income.

When establishing the benefit, income can include salary and, depending on the circumstances, regular and predictable bonuses. Employer contributions to certain retirement arrangements may also be considered. Income attributable to the person’s status as a shareholder generally should not simply be added to their employment income for WLRP purposes.

This becomes particularly important with owner-managed businesses where salary, dividends and retained corporate earnings can all form part of the owner’s overall financial picture.

Can You Establish a WLRP Without Group LTD?

Yes.

Although I most commonly look at WLRPs as a way to top up an existing Group LTD plan, a company doesn’t necessarily need Group LTD first.

A standalone WLRP may make sense where traditional Group LTD isn’t available, doesn’t provide enough coverage, or where the company wants stronger individual Disability Insurance contracts for a particular employee class.

The same basic rules still apply. It needs to be a genuine grouped employee arrangement rather than simply a corporate-paid policy for 1 individual.

What Happens if the Employee Leaves?

Because individual policies are being used, the plan can potentially be designed so an employee takes ownership of their policy when they leave the company.

The employee would become responsible for the premiums, and the insurer’s requirements for transferring the policy would need to be met. The disability benefit may also be adjusted from the taxable WLRP amount to the amount supported by the insurer’s non-taxable individual limits.

That can be extremely valuable.

Imagine someone obtained their coverage at age 40 while healthy. They leave the company at age 48 after developing a significant medical condition.

Being able to preserve an existing individual policy could be much more valuable than having to apply for brand-new coverage at that point.

How I Would Approach Implementing a WLRP

I wouldn’t start by simply quoting individual policies.

I would approach it in this order:

1. Review the existing Group LTD plan. Understand the benefit percentage, maximum, Non-Evidence Maximum, tax status, definition of disability, benefit period, offsets and Optional LTD provisions.
2. Identify the actual coverage gap. Calculate what the high-income employees would receive and compare it with their after-tax income.
3. Define the employee class. Determine who the company wants to protect and make sure there is a reasonable rationale for that class.
4. Confirm eligible employment income. Review T4 income, regular bonuses and other qualifying employment remuneration.
5. Determine the underwriting strategy before anyone applies. Consider regular underwriting, GTI or GSI where available.
6. Coordinate the individual coverage with Group LTD. Review issue limits, Combo Limits, existing coverage and tax treatment.
7. Document the WLRP properly. A board resolution and formal plan document are commonly used, with legal counsel determining the appropriate documentation.
8. Review the arrangement regularly. Compensation changes, employees join and leave, and the underlying Group LTD contract can change.

The Biggest Problem Is Finding Out Too Late

Most Group LTD plans aren’t bad plans.

They’re designed to provide affordable income protection across a broad group of employees.

The problem is assuming that the same plan provides the same level of protection to everyone.

It doesn’t.

Someone earning $85,000 may have approximately 85% of their after-tax income protected.

Someone earning $350,000 under the exact same plan might have only 26.5%.

And both may believe they have “66.67% LTD coverage.”

That’s the gap employers need to identify.

Because once someone becomes disabled, it’s generally too late to purchase additional coverage for that claim.

For businesses with executives, professionals or other high-income employees, a Wage Loss Replacement Plan can provide an effective way to supplement Group LTD while also providing stronger individual contracts, potential tax efficiencies and additional underwriting options.

The first step isn’t necessarily implementing a WLRP.

It’s simply asking:

If one of our highest-paid employees became disabled tomorrow, how much would they actually receive?

You may be surprised by the answer.

At SecurePlan, we can review your existing Group LTD plan, identify where high-income employees may be underinsured, and explore whether increasing the Group LTD maximum, using Optional LTD, implementing a Wage Loss Replacement Plan or combining different solutions makes the most sense.

Wage Loss Replacement Plans involve insurance, tax and legal considerations. Employers should obtain appropriate accounting and legal advice when establishing a plan. Carrier products, underwriting requirements and program limits can change over time.

– Jeff

*Disclaimer: This article is intended for general informational and educational purposes only and does not constitute personalized insurance, financial, legal, or tax advice. Insurance needs, policy features, costs, and suitability vary based on individual circumstances and specific contract provisions. Coverage availability and terms are subject to insurer underwriting and approval. Readers should review their own situation carefully and consult with a licensed insurance advisor before making any insurance decisions or changes to existing coverage.