Most group long-term disability policies and employer-sponsored long-term disability plans include a provision called “Offsets,” “Other Income Benefits,” “Income Which Will Reduce Your Disability Benefit,” “Deductible Sources of Income” or a similar name. These provisions allow the insurer to reduce the monthly disability benefit that you would otherwise receive under the disability insurance policy by the amount of the “other income” paid to you during the same time period. Each policy is different, but the insurer is usually allowed to reduce your monthly disability benefit by the following types of “other income” you receive: (1) Social Security disability benefits; (2) California State disability benefits; (3) disability benefits paid under Workers’ Compensation laws; (4) retirement plan benefits funded by the employer that issued the group policy; (5) unemployment compensation; (6) amounts received in a personal injury lawsuit settlement or judgment for loss of earnings; and (7) amounts received as sick leave, salary continuation, vacation pay and personal time off.
For example, if your monthly disability benefit under your policy is $1,000 and you receive Workers’ Compensation benefits of $400 per month, your disability insurer would only be responsible to pay you $600 per month while you are receiving Workers’ Compensation benefits. Once you stop receiving Workers’ Compensation and, assuming you are still disabled, your monthly disability benefit would increase to $1,000.
Sometimes an insured receives so much in “other income” payments that it totals more than his or her monthly disability benefit. In that case, the insured is typically entitled to receive only a “minimum benefit,” the amount of which is defined in the policy. Many times the minimum benefit is the higher of 10% of the full monthly benefit or $100 per month.
Social Security disability benefits are probably the most important offset. Under most group long-term disability policies, the disability insurer is provided a dollar-for-dollar deduction of Social Security disability benefits received by their insured. The offset lasts through your Social Security retirement age (65 to 67 years old depending on your date of birth) if you are still disabled, much longer than Workers’ Compensation or State disability benefits, typically a maximum of two years and one year, respectively. Social Security can thus reduce your monthly benefit for the entire duration of your policy. Essentially, the United States government and your tax dollars end up paying for a good portion of your disability instead of the disability insurance company to which you or your employer paid premiums.
Social Security disability benefits typically increase over time to compensate for the effect of inflation on fixed incomes. This increase is called a “COLA,” or cost-of-living adjustment. Some states, such as California, have laws that prevent insurance companies from reducing your benefit if your Social Security disability benefit goes up. California Insurance Code section 10127.15 in fact provides that, “Any provision contained in a policy of disability insurance . . . for a reduction of . . . benefits during a benefit period because of an increase in benefits payable under the federal Social Security Act . . . shall be null and void . . .” Even if no law prohibits an insurer from reducing your benefit, insurance policies will often contain a provision stating that the insurer will not do so due to a COLA.
The fact that an insurance company is often not entitled to offset a COLA paid by the Social Security Administration can be very beneficial to an insured. If, for example, your policy’s disability benefit is $1,000 per month before offsets and you are receiving $400 per month in Social Security disability (leaving a net policy benefit of $600 per month and total income of $1,000 per month between both sources), and then you start receiving $50 more per month due to an increase in your Social Security for a COLA, your disability insurer cannot reduce the policy benefit by the $50 COLA increase. Thus, you would continue to receive $600 per month from your insurer (not $550 despite the $50 COLA), in addition to the $450 from Social Security for a net increase in your monthly income of $50 or, $1,050 per month total. That can be particularly important if you are young and permanently disabled. In such a scenario you may end up receiving numerous COLAs from Social Security over a period of decades substantially boosting your “other income,” but in many States such as California, the law will not permit your disability insurer to take advantage of that by reducing the policy benefit by the COLA amounts.
Group disability policies or plans almost always allow the insurer the right to be reimbursed for any “overpayment” it makes to its insured of monthly disability benefits due to your receipt of “other income.” An overpayment of benefits most often occurs if you are approved for Social Security disability. Approval by the Social Security Administration routinely occurs well after you apply for benefits because Social Security disability claims take a long time to process – you have to love our bureaucrats. At that time, the Administration will pay you a retroactive lump sum for past due benefits or “back-pay” (while your application was processed and also because federal law permits an award of Social Security benefits dating back as much as one year before you applied). And it will also start paying you a monthly amount on an ongoing basis. Thus, you may receive monthly benefits from your disability insurer for months or years without a reduction for Social Security because you would not have received Social Security yet. When you receive your lump sum award, however, your insurer will certainly “come knocking” to collect the overpayment it made in past months as a result of the retroactive Social Security back-pay. Your insurer has that right under the policy, though a skilled ERISA lawyer can sometimes avoid you reimbursing the overpayment based on various case law arguments, e.g. if the Social Security money you received was commingled with your other general funds, is not traceable to definitive property, or spent and no longer in your possession. See our article entitled, “Ruling Limits Insurance Company’s Ability to Collect SSDI Overpayments.”
Many group disability policies include language obligating the insured to pursue all “other income benefits” for which the inured may be eligible, including Social Security. If such benefits are not applied for, then under the provisions of most policies, the insurer has the right to estimate the insured’s entitlement to these benefits and then reduce the monthly disability benefit by the estimated amount. Usually, however, the insurer is not entitled under the policy’s language to reduce your monthly benefit by an estimated amount if you: 1) apply for all other income benefits to which you might be entitled; 2) appeal any denial to all administrative levels the insurer feels is necessary (the law requires only that you appeal to the administrative law judge level); and 3) sign the insurance company’s Reimbursement Agreement, which states that the insured promises to pay the insurer any overpayment caused by an award.
If your disability insurer denies your claim, but you were approved to receive disability benefits from Social Security, the State of California or Workers’ Compensation, often times your insurer will completely ignore that disability finding in its claim denial. Experienced ERISA attorneys such as the McKennon Law Group can use that to your advantage. Federal courts have ruled that where a disability insurance company denies a claim without explaining why its decision differs from that of the Social Security Administration, it tends to show that the insurer did not properly evaluate the insured’s claim.
If you are an employee covered under your employer’s group disability plan or policy and had your claim denied, or if you have questions about what sources of “other income” may result in an offset to your disability benefit, you should immediately contact the McKennon Law Group PC at (949) 387-9595 for a free consultation, a law firm specializing in ERISA insurance and employee benefits litigation. Let us decide whether your claim was wrongfully denied or whether your insurer is wrongfully offsetting your benefit, and let us see if we can assist you.
