Suppose some unforeseen event leaves you unable to continue working.  If you have insurance covering short-term disability, long-term disability, or both, you will be eligible to receive benefits determined by your income prior to becoming disabled.  Now you can rest easy, right?  Not necessarily.  Regardless of the proportion of your pre-disability income that you will be eligible to receive as disability benefits, those benefits can be reduced through offsets.  What is an offset?  Simply put, it is a mechanism through which your disability insurance company can and will reduce your disability benefits on a dollar-for-dollar basis.  If you have a group disability policy (as opposed to an individual disability policy), your policy almost certainly contains a provision allowing the insurer to reduce your benefits by the amount you receive as “Other Income Benefits.”  Other Income Benefits can include income from Social Security Disability Income (SSDI) benefits, state disability benefits, worker’s compensation benefits, Veteran’s Administration benefits or other sources.

For example, if your employment income was $10,000 per month and you became totally disabled, and you therefore became eligible for long-term disability benefits of 60% of your pre-disability income, your monthly benefit would be $6,000.  However, if you applied for SSDI as required by your policy, and were approved for benefits of $2,000 per month, your insurer will offset your policy benefits by $2,000, and will now only pay you $4,000 per month.  While this is a relatively straightforward concept, it can quickly become convoluted and complicated, and can compound the headaches and frustration that often are associated with a disability claim.  Therefore, it is important to consider several factors in order to avoid being caught off guard by receiving less than you anticipated in disability benefits.

First, it is important to know the source of any income you receive, and whether the income is subject to offset.  Your disability insurance policy, which is often part of an ERISA plan offered by your employer, will discuss sources of income and whether they qualify as “Other Income Benefits” that are subject to offset.  But what about income that is not discussed in the policy?  If you cash in some of your retirement savings account, will your insurance company consider that “income” and reduce your disability benefits?  It depends on the plan language.  Rest assured that your insurer will take advantage of any possible offset, so if your policy is unclear as to whether a certain kind of income is subject to offset, you should expect the insurance company to err on the side of offsetting benefits.  To avoid your benefits being improperly reduced, you should read your disability plan carefully and understand the source of your other income to decide whether the income is subject to offset.  If you believe that your insurer is improperly reducing your benefits via an offset that is not provided for in the plan, an experienced California disability insurance attorney can assist you in determining whether your insurer is properly offsetting your disability income benefits.

Second, the timing of when you receive “other” income can significantly impact the overall picture of your benefits.  The Social Security Administration currently takes several months to make claims determinations in many cases, so you may not get an answer to your claim for SSDI benefits until long after you started receiving policy disability benefits.  However, if your SSDI benefits are approved, those benefits will likely be initially paid in a lump sum that covers the previous several months, which can be a substantial amount.  But if your insurance company has been paying your long-term disability benefits throughout that time, it will apply the offset retroactively and require you to reimburse it for this “overpayment,” which can mean repaying your insurer the amount of your lump-sum payment.  For example, suppose you have been receiving $4,000 per month in long-term disability policy benefits for one year ($48,000 total) and you receive one year’s worth of retroactive SSDI benefits of $2,000 per month ($24,000).  Your insurance company will expect to be reimbursed that $24,000.  It may be easy enough to issue a check to your insurance company for the amount that you received in SSDI benefits; however, it may not.  Your insurer may not request reimbursement until later, during which time you may have spent some of this much-needed money; you may have been unaware that you need to reimburse the insurance company in such a scenario.  Being in a situation where your insurer is requesting reimbursement for offsets can lead to distress and anxiety.

Third, it is important to be aware of the amount of the offset.  An insurance company may try to offset more than it is allowed to offset under the policy.  For example, if you receive SSDI benefits, they will periodically increase due to cost-of-living adjustments.  But cost-of-living adjustments are not subject to offset under group disability policies.  Or consider a recent case that McKennon Law Group handled that involved a Sheriff’s Deputy who became totally disabled due to injuries suffered in a devastating auto accident.  Our client received long-term disability benefits according to his policy (after we successfully handled his ERISA appeal); but those benefits did not cover his household expenses, and his wife had to reduce her work time to be able to care for him and their two young children.  The Deputy was fortunate enough to have many colleagues in the Sheriff’s Department willing and wanting to help him, and many did so by donating their accrued sick time to him.  To facilitate these donations, our client was paid through his employer’s payroll system, and the donations appeared on his pay stubs as “Donated Sick Time.”  The policy allowed the insurer to offset income from normal accrued sick time that our client was paid while receiving his disability benefits.  The insurer considered all of the sick time pay donated to our client by his colleagues to be subject to offset.  Because these donations amounted to just as much as the Deputy’s monthly disability benefits, the net result was that he received the minimum benefit under the policy, or $100 per month.

Obviously, none of the Deputy’s colleagues donated their sick time to him so that the insurer could benefit from those donations; the notion that an insurance company would intercept donations from individuals who are trying to give aid to their Sheriff colleague in need is enough to infuriate any reasonable person.  In fact, had his colleagues known their donations would not go to him, but would rather be collected by the insurance company for its sole benefit, they would not have made the donations in that manner.  The policy allowed for the insurer to offset any income that the Deputy received from the employer, including undonated “sick time.”  However, the policy was silent as to whether “sick time” included donated sick time.  The insurer argued that because the money was distributed via the employer’s payroll system, any money labeled “sick time” was subject to offset.  McKennon Law Group filed a lawsuit to recover all of the donated sick-time pay that the insurer took as an offset.  Because the insurer did not respond to the lawsuit, our client obtained a substantial default judgment in excess of $350,000, indicating a high likelihood that the insurer realized that its position was meritless.

This case serves as a reminder that offsets can significantly impact a claimant’s disability benefits.  Insurance companies paying disability benefits will likely claim as many offsets as possible, including offsets to which they are not entitled.  Thus, it is important to understand what offsets your insurer is taking, and whether it is entitled to take those offsets.  Because you may not know whether your insurer is taking improper offsets, you should consult with an experienced California disability attorney like those at McKennon Law Group.  The highly experienced lawyers helping clients with disability insurance at McKennon Law Group can help you determine whether your insurer is improperly reducing your disability benefits via offsets, and if that is happening, our firm can help you recover the benefits to which you are entitled.