Late last year, the California Assembly passed Assembly Bill 2883, which had major repercussions for the insurance industry. More importantly, the bill’s change in the definition of an employee within the Labor Code carried serious implications for some business owners who could no longer exclude themselves from coverage under their own workers’ compensation policy.
In a nutshell, the legislation required all officers, members and partners to be covered under the workers’ compensation policy unless more restrictive qualifications were met.
Just to refresh everyone’s memory, AB 2883 changed the labor code in four significant ways:
1. Officers of a corporation must have owned at least 15 percent of the corporate stock in order to be excluded.
2. Owners of a partnership or LLC must have been “general partners” or “managing members” in order to be excluded.
3. Officers, members and partners must have signed a waiver of coverage and submitted this waiver to the insurance carrier.
4. Officers who held their corporate stock in a trust were not eligible to sign a waiver and could not be excluded.
The change last year was met with extreme dissatisfaction from nearly everyone in the insurance industry, a sentiment that was echoed by business owner constituents who were stuck paying premium for coverage that they did not want.
Elected officials heard those complaints and quickly began crafting a cleanup bill (Senate Bill 189) which made its way to the desk of Gov. Brown in September, and is set to take effect in two stages over the next year.
Let’s take a look at the workers’ comp landscape as it is set to change on Jan. 1, 2018:
SB 189 allows carriers to backdate waivers to Jan. 1, 2017. This is of critical importance for many officers/partners/members who were not made aware of the change in the labor code, and did not execute a waiver of coverage before implementation of the Jan. 1, 2017 legislation.
Such owners might have been late executing waivers, or they might have never known that a waiver was required. The takeaway is simple: If you were charged premium because you were late executing a waiver of coverage, you can submit a waiver up to Dec. 31, 2017, and your insurance carrier may backdate that waiver and refund your premium. Of course, you must still own the requisite 15 percent stock (not in trust) or qualify for exclusion as a managing member or general partner.
If you are one of the many owners who didn’t know about AB 2883 until your annual premium audit, now is your opportunity to rectify the situation. While carriers are not required to backdate waivers and refund premiums, most are making a good faith effort to help their customers by revising audits to exclude coverage that was not desired.
Bigger changes are just around the corner and come into effect Jul. 1, 2018:
Requisite Stock Percentage: The current minimum stock ownership for a corporate officer to be excluded is set at 15 percent. That minimum will be bumped down to 10 percent. In a further twist, an officer can be excluded with as little as 1 percent if her immediate family member also owns 10 percent of corporate stock, and if she is covered by a health insurance policy.
Trusts: Those who hold their stock in a trust will soon be eligible for exclusion once again, assuming they hold the requisite amount of corporate stock in trust. This excludability is a significant giveback that was taken away last year with the implementation of AB 2883.
Many family-owned businesses hold corporate stock in the name of a trust for succession planning purposes. When AB 2883 was implemented, the labor code no longer allowed for such a trustee to be excluded from workers’ comp coverage since that natural person was not named as the shareholder in the corporation. Fortunately for such family-owned businesses, SB 189 corrects that issue, albeit a correction that costs the business one or even two years in unwanted coverage.
Professional Corporations: Owners of PC’s (think doctor, dentist, attorney, etc.) will have much broader excludability under the new version of the code. Effective Jul. 1, 2018, owners of PC’s who are also practicing the professional services for which the corporation is organized, are eligible to execute a waiver regardless of their share of corporate stock.
The prior labor code revision wreaked havoc for PC’s, in particular those with more than six owners, since not more than six could own 15 percent of the corporation. In many instances, this meant that all owners were subject to coverage. In some extreme cases, this resulted in premium increases in excess of 300 percent.
Cooperative Corporations: Also, effective mid-2018, co-op officers and board members will be eligible to execute coverage waivers. No stock percentage is required, but it is required that the officer/board member carry health and disability insurance.
While SB 189 does solve many of the problems created by its predecessor, many business owners and insurance experts agree that a full repeal of AB 2883 would have been preferential. Most industry insiders agree that AB 2883 was a solution to a problem that didn’t exist. In only a handful of rare instances where employees were improperly excluded from coverage in the lead up to the 2017 labor code revision. Unfortunately, the impact of this misguided bill was felt by those business owners who couldn’t afford the additional premium and never would have filed a workers’ comp claim against their own company in the first place.
The changes taking effect in 2018 are complex and contain many nuances that should be discussed in detail with your insurance professional. It’s critical that the conversation happen as soon as possible to ensure the most advantageous outcome for your business.
– Nelson Aldrich is an insurance broker with WISG Insurance, headquartered in Turlock. He can be reached at [email protected].