ISSUE: U.S. Department of Labor and Special Fund Assessment

Jack_crop 72dpiUnfortunately, Brandon Miller, the Chief, Branch of Insurance and Financial Management at the Division of Longshore and Harbor Workers’ Compensation, Office of Workers’ Compensation Programs, U.S. Department of Labor, has announced that he is leaving his job in a few weeks. He has accepted a position in Minnesota. Brandon always handled his challenging position at DOL in a reasonable, level headed, and overall very competent manner. The Longshore maritime community is losing an important asset.

SPECIAL FUND ASSESSMENT

The U.S. Department of Labor recently sent out the advance billing for the 2013 Special Fund Assessment, so it’s a good time to review what the Assessment is and how it is calculated.

The Special Fund was established by Section 44 (33 U.S.C. 944) when the Longshore Act was enacted in 1927. It was originally funded by Congressional appropriation and through $5,000 payments into the Fund by insurance carriers and self-insurers in death cases with no eligible survivors.

The Special Fund is administered by the Secretary of Labor. The Fund is not property of the U.S. Government, but the U.S. Treasury is the custodian. Disbursements can only be made as specified in Section 944(i). The purpose of the Fund is to spread certain costs across the industry, such as vocational rehabilitation training and maintenance, payments in insolvency cases, and indemnity benefits in second injury cases. Payment in second injury cases under Section 908(f) account for about 90% of Fund expenditures.

The 1972 amendments to the Longshore Act made significant changes to the Assessment process, providing for the funding of the Special Fund by creating the annual assessment of authorized insurance carriers and self-insurers. Each assessment was determined by the ratio of each insurance carrier and self-insurer’s indemnity and medical payments in the preceding calendar year to the total of all payments during that year.

The 1984 amendments again made significant changes. The assessment formula was changed to incorporate a second injury usage factor due to concerns about the growth of the Fund and the apparent inequitable distribution of the usage under Section 8(f). Prior to the 1984 amendments, a carrier or self-insurer could place a case in the Special Fund for payment under Section 8(f) and there would be no direct, material consequence to its assessment in subsequent years. The 1984 amendments changed the assessment formula to the one used today, which takes into account both direct indemnity payments as well as usage of the Special Fund under Section 8(f) by each authorized insurance carrier and authorized self-insured employer.

FORMULA
First, calculate ratio number one by dividing each insurance carrier or self-insurer’s direct indemnity payments during the preceding calendar year by the total of all indemnity payments during that year;

Second, calculate ratio number two by dividing each insurance carrier or self-insurer’s attributable Special Fund payments under Section 8(f) (second injury cases that each carrier or self-insurer have placed into the Fund) during the preceding calendar year by the total Special Fund payments under Section 8(f) during that year;

Third, add the two ratios;

Fourth, divide the sum of the two ratios by 2;

Fifth, multiply this result times the estimated needs of the Special Fund for the current calendar year.

The result is the insurance carrier or self-insurer’s Special Fund assessment.

Any carrier or self-insurer who either paid indemnity benefits directly to an injured worker or who had a case in the Special Fund under Section 8(f) in 2012 will get an assessment bill in 2013.

The assessment is billed in two parts; there is an advance billing in January for an estimated one-half of the total, and a final billing in July for the balance.

Here is a sample calculation for a hypothetical insurance carrier with 2012 direct indemnity payments of $500,000 and attributable Special Fund payments under Section 8(f) of $250,000. Total indemnity paid by all authorized insurance carriers and self-insurers during 2012 in our hypothetical was $775,000,000. Total 2012 Special Fund payments under Section 8(f) was $114,000,000. The estimated needs of the Special Fund for calendar year 2013 in our example is $134,000,000

First, calculate ratio number one by dividing the individual insurance carrier’s direct indemnity payments of $500,000 by the total for all insurance carriers and self-insurers of $775,000,000. The result for ratio number one is .00064516.

Second, calculate ratio number two by dividing the individual insurance carrier’s attributable Section 8(f) costs of $250,000 by the total Section 8(f) payments for all Fund cases of $114,000,000. The result for ratio number two is .00219298.

Third, add the two ratios: .00283814

Fourth, divide the sum by 2: .00141907

Fifth, multiply this result times the estimated needs of the Special Fund for 2013 of $134,000,000.

The result is the insurance carrier’s 2013 assessment in the amount of $190,155.

For questions regarding the assessment you can contact the Longshore Division at 202-693-0038.

ISSUES – SPECIAL FUND

1927 – The Special Fund was established by section 944 (33 U.S.C. 944) when the Longshore and Harbor Workers’ Compensation Act was enacted in 1927.  It was originally funded by Congressional appropriation and through payments into the Fund by insurance carriers and self-insurers in death cases with no eligible survivors.

There are actually two Special Funds.  When the District of Columbia Workmen’s Compensation Act was enacted in 1928 as an extension of the Longshore and Harbor Workers’ Compensation Act, a separate Special Fund was created and is still being administered for District of Columbia cases with dates of injury prior to July 27, 1982, when the original District of Columbia Act was repealed.

Cases under subsequent extensions of the Longshore Act (Defense Base Act, Outer Continental Shelf Lands Act, and Nonappropriated Fund Instrumentalities Act) are all included in the Longshore Special Fund.

The Special Fund is administered by the Secretary of Labor, and the custodian is the U.S. Treasury.  The Fund is not property of the U.S. Government.  Disbursements can only be made as specified in Section 944(i).  The purpose of the Fund is to spread certain costs across the industry, such as vocational rehabilitation training and maintenance, insolvency, and indemnity benefits in second injury cases.

The original version of the second injury provision, section 908(f), was little used compared to today, when payments in second injury cases account for nearly 90% of Fund expenditures.  As originally enacted, section 908(f) provided that if an employer hired a worker with a pre-existing disability (due to an injury, not just a pre-existing impairment) then in the event of a subsequent injury the employer would be liable only for the disability caused by the subsequent injury.

1972 – The 1972 amendments to the Longshore Act made significant changes.  The amendments provided for the funding of the Special Fund by creating the annual assessment of authorized insurance carriers and self-insurers.  Each assessment was determined by the ratio of each carrier and self-insurer’s indemnity and medical payments in the preceding calendar year to the total of all payments during that year.

Section 908(f) was changed by the 1972 amendments to provide that pre-existing disability could be any impairment or defect and the employer’s liability in a qualifying case in most instances would be limited to 104 weeks of permanency plus medical costs.

The 1972 amendments created the conditions which led to huge growth of the Special Fund during the 1970s and early 1980s.  In fiscal year 1976 the Special Fund paid $80,000 in 19 second injury cases.  By 1993 this annual expenditure had grown to over $90 million in about 4,500 section 908(f) cases.  In 1993 the assessment exceeded $100 million for the first time.

1984 – The 1984 amendments again made significant changes.  The assessment formula was changed to incorporate a second injury fund usage factor, due to concerns about the growth of the Fund and the apparent inequitable distribution of the assessment.  Prior to the 1984 amendments a carrier or self-insurer could place a case in the Special Fund for payment under section 908(f) and there would be no direct consequence to its assessment in subsequent years.  The 1984 amendments changed the assessment formula to what we have today.

The old formula was based on total compensation and medical payments for each carrier/self-insurer during the preceding calendar year divided by the total of all compensation and medical payments, multiplied by the estimated needs of the Fund for the current year.

The new formula added a factor in the calculation to take into account usage of the Fund under section 908(f).  Medical payments were also dropped from the calculation.

OLD FORMULA (using prior calendar year numbers):

First, calculate each individual insurance carrier’s and self-insurer’s ratio by dividing the individual indemnity and medical payments during the prior calendar year by the total of all indemnity and medical payments during the prior calendar year;

Second, multiply each carrier’s and self-insured’s ratio by the needs of the Special Fund for the current calendar year.

The result is each carrier’s or self-insured’s assessment.

NEW FORMULA (using prior calendar year numbers):

First, calculate ratio number one by dividing each carrier’s and self-insured’s indemnity payments during the prior calendar year by the total of all indemnity payments during the calendar year;

Second, calculate ratio number two by dividing each carrier’s and self-insured’s attributable Special Fund payments under section 908(f) (second injury cases that each carrier or self-insurer have placed into the Fund) by the total Special Fund payments under section 908(f) during the prior calendar year;

Third, add the two ratios;

Fourth, divide the sum of the two ratios by 2;

Fifth, multiply this result by the needs of the Special Fund for the current calendar year.

The result is each carrier’s or self-insured’s assessment.

The assessment is billed in two parts each year; an advance billing in January for an estimated one-half of the total, and a final billing in July for the balance.

The 1984 amendments also added an “absolute defense” on behalf of the Special Fund to enforce the requirement that all applications for section 908(f) relief be presented to the DOLs District Directors as soon as permanency becomes an issue in each case.

Today, the Special Fund makes payments under section 908(f) for second injury cases (about 89% of Fund expenditures), under section 910(h) for one half of the annual cost of living adjustments in pre-1972 amendment cases, under section 908(g) for maintenance allowances to persons undergoing vocational rehabilitation training, under section 918(b) in insolvency cases, under section 907(e) for impartial medical examinations, and under section 939(c) for vocational rehabilitation training services.

Funding for the Special Fund comes from the annual assessment (99%), from fines and penalties, from interest earned on Special Fund balances, and from $5,000 payments into the Fund in death cases where there are no eligible survivors.