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Payroll – Superannuation – exception to ‘opt in’ insurance

Persons in certain dangerous occupations should be aware of the opt-out/opt-in status of insurance through their superfunds. A Bill which provides for insurance to apply only if certain super fund members choose to have insurance through their super fund has been passed with an exception that is likely to especially interest our readers. This article focusses on the exception.

Commonly, super funds provide insurance such as life, total permanent disability and income protection insurance to members unless the member opts out of the insurance (the current default position) because they do not want it. The cost of such insurance has been found to erode the super fund balances of young members and those with multiple funds with low balances.

Overview

The Treasury Laws Amendment (Putting Members’ Interest First) Bill 2019 (the Bill) which was recently passed by Federal Parliament and is awaiting Royal Assent addresses this problem by preventing most super funds from automatically providing the insurance to young members and those members with a low balance in their super fund account and instead requiring them to choose (opt in) to have the insurance provided to them. In some cases, this change will not apply in respect of members in dangerous occupations (including police, fire fighters, ambulance officers, and other emergency service workers). A super fund will be able to continue to provide insurance to such members on an opt-out basis.

Insurance provided through super funds – the basic position

The Bill applies to super funds with 5 or more members and where an employer is not, in effect, meeting the cost of the member’s insurance. This article relates to such super funds.

Once the Bill becomes law, the basic position will be that a super fund is prevented from providing insurance to a member on/after 1 April 2020 where the member:

  • has an account balance in the super fund of less than $6,000 and has not had an account balance of at least $6,000 on/after 1 November 2019, unless the member opts in, or
  • is under 25 years and begins to hold a superannuation account in the fund on or after 1 April 2020, unless the member opts in.

The two key points are:

  • The Bill only applies to the above categories of members – other members whose super funds ‘automatically’ provide insurance cover will have to elect to opt out of the insurance.
  • If members in the above categories want to be covered by relevant insurance provided by their super fund, they will need to advise their super fund that they want to be covered (i.e. opt in).

The Bill requires super funds to notify existing members who have an account balance of less $6,000 on 1 November 2019 that they need to make an election to opt in if the member wants to continue existing insurance after 1 April 2020 and the member has not had an account balance on/after 1 November 2019 that was at least $6,000. Such members, who have not previously made an opt-in election, can expect their super fund to give them a written notice by 1 December 2019.

Under the Bill, a super fund must also give a notice which is similar to that mentioned in the preceding paragraph to a person who opens an account with the super fund after 1 November 2019.

An exception – special treatment of persons in dangerous occupations

The Bill has several exceptions in relation to the need to opt-in. For example, ADF Super members (or persons who would be an ADF Super member apart from having chosen for Commonwealth super contributions to be made to a fund other than ADF Super) will not be affected by the changes – the current default position will continue to apply in relation to any insurance cover provided by the super fund.

A further exception has been made for members in a dangerous occupation and this will be especially pertinent to employees of many TaxEd subscribers.

The dangerous occupation exception can only apply to a member of a super fund where the super fund elects that the exception will be operative in respect of the fund. The super fund must publish a notice of the election on its website.

Where the super fund has decided the exception will operate, the legislative requirement for a young or low balance member to opt in does not apply to a member who engages in an occupation falling within the set of occupations selected by the super fund from a range of dangerous occupations defined in the Bill. The current default position will continue to apply to these members.

Note that the super fund determines the particular set of dangerous occupations which are covered by the exception and the Bill merely prescribes the occupations from which the super fund can choose. The super fund makes (and can wholly discontinue or vary) its choice of dangerous occupations, by notice given to APRA. The super fund must publish its selected dangerous occupations comprised in the exception, on its website.

In relation to the exception, the Explanatory Memorandum (EM) notes:

‘The dangerous occupation exception recognises that certain occupations carry a higher degree of risk which provides a basis for retaining the current opt out insurance settings for members employed in these occupations.’

Not every fund of which a person is a member can apply the dangerous occupation exception to the member. In order for a fund to provide insurance on an opt-out basis, it must be ‘reasonable to expect that some or all of the contributions paid into the product [i.e. the superannuation product which the member acquires from the super fund] will be paid in respect of … [the relevant dangerous] employment.’

Example 1.2 given in the Supplementary EM illustrates the above point:

‘Angus is 23 years old and is a roof plumber. Angus commenced this job in February 2020. Orange Fund receives contributions in respect of this job and provides Angus with insurance on an opt out basis under the dangerous occupation exception based on the trustee’s election which has been certified by an actuary.

Angus starts a second job as a part-time bartender, which is not a dangerous occupation. Purple Fund receives contributions in respect of this job, is aware of Angus’ other employment as a roof plumber and his other fund, and has encouraged Angus to consolidate his superannuation accounts, but Angus has not done so.

Simply knowing that Angus may make a contribution to Purple Fund in respect of a dangerous occupation is not sufficient to establish a reasonable expectation that contributions for the dangerous occupation will be paid into the product. Therefore, Purple Fund would not be able to provide Angus insurance on an opt out basis under the dangerous occupation exception.’

Where the dangerous occupation exception applies to a particular member, the super fund must inform the member within 28 days of the exception applying. The notice must give details of the annual cost of the insurance to the member and state how the member may elect to opt-out of the insurance.

Conclusion

As a broad practical summary, the dangerous occupation exception will only be relevant to young (under 25 years of age) members of a super fund or members with low (under $6,000) super fund account balances, as the general protection contained in the Bill does not apply to other persons in any event.

Action Points

The foregoing discussion has been provided as general background information. The dangerous occupation exception is likely to be particularly applicable to persons employed by a material number of our subscribers and we think a brief note would assist in understanding queries from such employees. However, employers should refer their employees to the employee’s appropriately qualified financial advisers and super fund for advice in relation to the changes.

The implementation of the new approach may cause some confusion/upheaval over the next few months.

As a practical matter, we suggest that after the Bill receives Royal Assent (i.e. becomes law) and before 1 April 2020 all super fund members under 25 years of age or who have an account with a super balance under $6000 should ensure that their entitlements to insurance cover on and after 1 April 2020 give effect to their wishes. Preferably, they should seek written confirmation of these entitlements from the super fund. However, for logistical reasons and in anticipation that super funds will be issuing notices of election to some members by 1 December 2019 as outlined earlier, super funds might appreciate that requests for written confirmations being made after that date rather than immediately.

All other members of super funds may similarly like to take the opportunity to check that their insurance entitlements reflect their wishes.

Further assistance in relation to Bill may derived from the EM for the Bill and supplementary explanatory memorandum which deals with the dangerous occupation exception