Terminating or scaling back group insurance: employment-law and insurance steps

When costs are being cut, benefits are the first to be put on the table, and group insurance is an obvious target. As a broker, I see that the decision then turns into a debate that mixes up two separate questions: first, what employment law allows (what the company promised its employees, and in what form), and second, what the insurance contract allows (when and how it can be terminated, and what happens to cases that have already occurred). It is worth untangling the two, because the order matters: it makes sense to give the insurer notice once the employment-law side is in order – the other way round, the company is left with an obligation towards its employees with no cover behind it any more. In this article I go through the steps for termination and scaling back, from clarifying the legal basis to informing employees; switching insurers is a separate question, which I covered in the article on switching insurers.

First, the legal basis: employment contract, internal rules or collective agreement?

The most important question is on what basis the employee receives the benefit. If group insurance appears in the employment contract – even in a single sentence ('the employer takes out group life and accident insurance for the employee') – it is part of the contract, and under Section 58 of the Hungarian Labour Code (Mt.) an employment contract can only be amended by mutual agreement of the parties: the company cannot remove the benefit unilaterally. In that case an amendment has to be signed with each employee concerned, and anyone who does not sign remains entitled to the benefit – terminating the insurance contract does not end this obligation; it only removes the cover behind it. If the benefit is laid down in internal rules, a benefits policy or a circular, under the Labour Code it is a unilateral commitment, which the employer can also make through internal rules or through a practice it has established unilaterally (Mt. Sections 15–17). A unilateral commitment can be amended or withdrawn for the future – typically with effect from the end of the period specified in the rules, for example the end of the calendar year – but within the period already committed to, under Section 16(2) of the Labour Code it can be amended to the employee's detriment or terminated with immediate effect only if the company's circumstances have changed so materially that performance would become impossible or would cause disproportionate harm. It is worth clarifying with an employment lawyer whether cost-cutting meets this test. The third case is a collective agreement or works agreement: if the benefit is included there, changing it requires a procedure with the trade union or the works council, as applicable. In practice, at many SMEs the benefit 'just exists': it is not in the employment contract, there are no internal rules either, and employees know about it from the announcement e-mail. Even this is not a situation without a legal basis – a practice followed over a longer period can also qualify as a commitment – so here too the safe route is a written termination, communicated in advance, with effect from a future date.

Scaling back instead of terminating: the intermediate options

Before the company terminates the whole contract, it is worth going through the intermediate options, because the cost can be reduced at several points while keeping the benefit. The first is narrowing the scope of cover: dropping rarely used or expensive elements and reducing the sums insured – this typically happens at the renewal date, on the basis of the insurer's new offer, or during the year with the insurer's consent, depending on the insurer. The second is narrowing the group of insured persons, for example keeping accident cover only for manual jobs. This is where the equal-treatment requirement of Section 12 of the Labour Code comes in: for the purposes of the Act the benefit counts as wages, so any distinction must be linked to the job, the risk or another objective criterion, not to particular individuals. The third is introducing an employee contribution, where the employee bears part of the premium – the rules on deducting it from wages and on the declarations required are covered in the article on employee contributions. In employment-law terms, scaling back is just as much a detrimental change to the benefit as termination – so the legal-basis question applies here too, only with lower stakes.

Terminating the insurance contract: form, deadline, premium

In a group contract the company is the policyholder, so the notice of termination is the company's declaration – the employees' consent is not required as far as the insurer is concerned; the company settles the employment-law side with its own employees. In its rules on indemnity insurance, the Civil Code (Ptk.) provides that a contract concluded for an indefinite period can be terminated in writing, with effect from the end of the insurance period, with thirty days' notice (Ptk. Section 6:466); group life, accident and health insurance is fixed-sum insurance, where the method of and deadline for termination are set out in the policy conditions – in practice these typically follow the same pattern (at the renewal date, in writing, with thirty days' notice), but where the policyholder is a company the conditions may also deviate from this, so you need to check the policy; and a fixed-term contract ends when its term expires. In practice, therefore, you need a notice of termination duly signed on behalf of the company that reaches the insurer at least 30 days before the renewal date; it is worth checking the accepted form in the policy, because it varies by insurer. If the deadline is missed, the contract typically continues for another insurance year, and the premium is due for that year. The insurer is entitled to the premium until the end of the period of cover; any part of the premium paid in advance for the period after termination is settled according to the policy conditions. It is important to note that not paying the premium is no substitute for termination: unpaid premium follows the path described in the article on premium payment – a payment reminder, a grace period, retroactive termination – and meanwhile the company is still promising its employees something that no longer exists. Signing and sending the notice of termination is the policyholder's own, non-transferable task; if you let me know, I help where I can with checking the deadline and the form.

What happens to pending claims and later cases?

The insurer pays for what occurred during the period of cover and is an insured event under your contract. If an employee's accident, surgery or hospital treatment took place before termination, the claim can still be reported after termination and must be assessed; for events occurring after the date of termination, however, the insurer no longer provides benefits, even if the employee has not yet been told about the termination. There are borderline cases that depend on the policy conditions: the days of a hospital stay that began before termination but continues afterwards, permanent impairment established months after an accident, or a course of treatment already under way under health insurance that finances medical services – for these, the policy conditions contain transitional rules that vary by insurer, so before giving notice it is worth listing the open cases. The policy conditions typically set a separate deadline for reporting claims, and often a limitation period for claims arising from the contract that is shorter than the Civil Code's general five years – this too varies by insurer. Some insurers offer the insured persons of a terminating group cover the option to continue individually, with or without new medical underwriting – this is not a statutory right but a matter of the policy conditions and the insurer's decision, so it is worth asking the insurer when you give notice. The leaver information template can also be adapted for this situation.

Informing employees, and the accounting side

It is advisable to inform employees of the termination or scaling back in writing, before it takes effect: the date on which cover ends, the fact that claims for events before termination can still be reported – where, how and until when – and whether there is an option to continue individually. The timing is not a matter of courtesy: for a benefit based on internal rules, communicating the change is a condition of its taking effect, and for one based on the employment contract, the amendment has to be signed before the benefit ends. On the accounting side, the group insurance premium is taxable income for the employee: the part of the premium attributable to the insured person – apportioned where necessary – is taxed as employment income (as wages), and it counts as a 'certain specified benefit' (egyes meghatározott juttatás) only if the premium per person cannot be determined even by apportionment (Personal Income Tax Act, Szja tv., Section 3, point 89(b), and Section 70(6)(b)); this tax burden falls away with termination, while a benefit replaced by a pay rise is taxed as wages just the same – it is worth recalculating this with your accountant. The accountant also closes off the settlement of the final premium, any refundable part of the premium and the accruals.

What should the company do? The order of steps

First, check where the benefit is set out – employment contract, internal rules, collective agreement or just practice – because this determines whether you need signatures, a unilateral notice or a procedure with the trade union. Second, decide between termination and scaling back: work through the intermediate options before letting go of the whole contract. Third, check the renewal date and the notice deadline on the policy, and align the employment-law steps with them. Fourth, list the open claims and read the termination clause of the policy conditions. Fifth, inform employees in writing, including the dates and how to report claims. The notice of termination must be signed and sent by the company; if you let me know before the renewal date, I prepare the comparison of the scaling-back alternatives and the paperwork, and I help where I can with reviewing the policy conditions. I cannot promise anything: the insurer pays only for what happened during the period of cover and is an insured event under your contract.

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Sources

• Labour Code (Mt.) – Act I of 2012, Section 12 (equal treatment; the benefit qualifies as wages), Sections 15–17 (unilateral legal statement, commitment, employer's internal rules), Section 58 (amendment of the employment contract by mutual agreement)
• Hungarian Civil Code (Ptk.) – Act V of 2013, Section 6:466 (indemnity insurance: termination of a contract concluded for an indefinite period in writing, with effect from the end of the insurance period, with thirty days' notice – for fixed-sum group contracts the policy conditions apply)
• Personal Income Tax Act (Szja tv.) – Act CXVII of 1995, Section 3, point 89(b) (the part of the group insurance premium proportionately attributable to the insured person), Section 70(6)(b) (certain specified benefit, if the premium per person cannot be determined even by apportionment)
• GRANTIS: Corporate insurance – guide and quick reference (terminating an open-ended contract in writing, 30 days before the renewal date)
• CIG Pannónia – Tax information for business companies (2 January 2024) – Szja tv. Section 3 point 89(b), Section 70(6)(b): apportioning the group premium

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• When to switch insurer – and when to stay
• When the employee also pays part of the premium: payroll deduction, declaration, non-payment and tax
• Leaver information template: an elegant, clear goodbye
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