Report on Self Insurance Groups
Distributions and the Corporations Code
There appears to be a conflict between the Corporations Code and the business models of some SIGs.
Because funding is required at a high (80%) confidence level, it is probable that a properly run SIG will be over-funded by the time the losses mature. The regulations contemplate the return of excess funds to the members and prescribe when the excess may be returned (no earlier than 23 months after the end of the program year, per Rule 15477). Current SIG regulations refer to
these as ―surplus experience can be
contributions.‖ The one of the incentives
return of surplus funds tied to each member’s loss that enable SIGs to achieve accident reduction, active
claim management, and supportive return-to-work practices.
Some SIGs prefer to use the
surplus funds as credits against the contributions members would otherwise be required to pay in subsequent years. For those SIGS that use direct payments, at least, it appears that the program design runs up against a prohibition in the Corporations Code.
Pursuant to Rule 15470, a SIG must be organized as a nonprofit mutual benefit corporation, a nonprofit charitable corporation, a nonprofit public benefit corporation, or a nonprofit religious or apostolic corporation, as appropriate for the type of employers in the SIG.
Corporations Code Sections 5410 and 7411 appear to prohibit distributions by nonprofit corporations or restrict distributions to circumstances not applicable here. Section 7411, relating to nonprofit mutual benefit corporations, states in part, ―(a) Except as provided in subdivision
(b), no corporation shall make any distribution except upon dissolution. [ ]
(b) A corporation
may, subject to meeting the requirements of Sections 7412 and 7413 and any additional restrictions authorized by Section 7414, purchase or redeem memberships.’‖
Some SIG administrators agree and see a need to change the Corporations Code to permit the return of surplus contributions. Some disagree that these returns constitute ―distributions.‖ CHSWC invites the opinions of experts in Corporations law. The legitimacy of distributions is, at best, dubious at present.
So long as there remains an unresolved argument, the more prudent course would be to remove any doubt. Accordingly, CHSWC recommends that either (1) the Director amend Rule 15477 to require surplus contributions to be released only in the form of credits against future contributions, prohibiting distributions except as permitted by the Corporations Code, or (2) the Legislature amend the Codes to provide that notwithstanding any other provision of the Corporations Code, a nonprofit corporation formed for the sole purpose of operating a group workers’ compensation self insurance fund pursuant to regulations promulgated under the authority of Article 1 (commencing with Section 3700) of Chapter 4 of Part 2 of Division 4 of the Labor Code shall not be prohibited by the Corporations Code from making distributions to its members as expressly approved pursuant to those regulations.