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Disability Benefits:
What Caregivers Should Know

By Glenn Kantor and Peter Sessions

If you are entitled to disability benefits through an employer-provided or private plan, you may be surprised to find that your plan has provisions that allow the insurer to deduct from your benefits other types of income you receive or are eligible to receive for your disability. These deductions are called “offsets,” and are permissible under state and federal law. Common offsets include Social Security disability benefits, workers’ compensation benefits, and benefits from state disability programs like those in California, New York, New Jersey, Rhode Island, and Hawaii.  Insurers can also deduct from your benefit any amounts you receive from working part-time (usually called “partial disability” or “residual disability” benefits), as well as retirement or pension benefits (including disability pension benefits).
 
The rationale behind offsets is this: If you were allowed to keep the full amount of all of the various disability benefits to which you might be entitled, it would be possible for you to earn more money on disability than you would by working.  Disability benefit programs, both public and private, are designed to avoid that result.
 
In cases where people are receiving benefits from enough different sources that their disability income exceeds the benefit amount in their policy, most policies have a minimum monthly benefit that is payable regardless of the total offset amount.  Each policy calculates this benefit differently.  Some policies have a set amount, such as $100; some set the amount as a percentage of your regular benefit; and some have a combination of the two.  Some policies, however, do not have a minimum monthly benefit at all­— insurers are not required to include one in their policies.
 
You can determine whether your plan contains offsets by looking at the part of the plan that explains how your benefit amount is calculated.  Most plans have language indicating that the insurer is allowed to deduct “other benefits” or “other income benefits.”  The policy will then have a separate section shortly thereafter explaining what types of benefits constitute “other benefits,” and how the insurer can offset them from your regular benefit. This language can vary significantly from policy to policy, so it is always extremely important to read and understand your policy to ensure your insurer is applying the offset provisions accurately.
 
You may wonder what kinds of offsets are allowed under the law and if there are any restrictions on how insurers can apply them.  For the most part, offset provisions are not heavily regulated.  For example, the Employment Retirement Income Security Act, or ERISA, is the federal law which governs employee benefits, including disability benefits.  However, ERISA is primarily concerned with explaining what employers and insurance companies must do if they offer benefits to employees.  It does not tell employers and insurers what kinds of benefits they have to offer, or how those benefits should be calculated.
 
You may also wonder if there is anything you can do to change the offset provisions that are in your policy.  Unfortunately, if you are receiving a disability benefit through your employer, the terms of your disability benefit plan have already been negotiated between your employer and the insurance company, and you can do nothing to change those terms.  If you are receiving benefits through a private policy of insurance, you can try to negotiate with your insurer to remove offset provisions, but they are unlikely to be receptive to your requests.
 
There are, however, some rules that govern how insurers may apply policy offsets.  Here are some examples:
 
Workers’ Compensation  
 
Workers’ compensation benefits are designed to compensate injured workers for replacement of wages, loss of use, and medical treatment, among other things.  If you receive workers’ compensation benefits, the insurer may attempt to offset all of your workers’ compensation benefits, even if they are not attributed specifically to lost wages. There is a strong argument that insurance companies should not be allowed to do this.  Under this argument, it would be permissible for an insurer to offset your “temporary total disability” benefits, because these benefits are typically based on your prior salary.  After you have become “permanent and stationary,” the insurer would not be allowed to offset the full amount of your “permanent total disability” benefits, because these benefits include compensation for multiple injuries, not just your lost wages.
          
California has recently enacted an insurance regulation that supports this argument. It allows group disability insurers to offset temporary total disability benefits, but prohibits them from offsetting permanent total disability benefits.  (10 California Code of Regulations Section 2232.45.4)
          
As always, read your policy carefully because it may contain language that limits the insurer from offsetting your entire workers’ compensation benefit.  For example, some policies only allow offsets for benefits based on “loss of time,” while others are more broadly worded.  This can be a confusing issue, so you should consult with your workers’ compensation attorney to ensure that your benefits are properly attributed to avoid being offset.
 
Subrogation 
 
An insurer can also offset your benefit by money you receive in a lawsuit against a party who caused your disability. The legal term for this situation is called “subrogation,” and involves the “make whole” doctrine. The make whole doctrine is a legal rule that says that if you are entitled to benefits from different sources for your injury – for example, from both the person who caused your injury and the insurer – the insurer can only collect its offset, that is, enforce its “subrogation rights,” if you have been “made whole” for your injury, or, in other words, you have been fully compensated for your injury. If your claim is governed by ERISA, conflicting legal decisions govern whether the make whole doctrine applies to your claim.  In some states (such as California) the courts will apply the doctrine, but in others, they will not.  If you are in this situation, you should consult with an attorney who specializes in ERISA law to determine whether the make whole doctrine applies to your claim so you can determine if the insurer has the right to offset your benefits, and if so, by how much.
 
Social Security 
 
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 10127.1)  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.
 
If you are receiving family Social Security benefits, or “dependent benefits,” in addition to your individual Social Security benefit, be aware that these benefits may also be offset.  Most policies limit offsets only to those benefits you are entitled to receive personally for your disability, but there is no law prohibiting insurers from offsetting dependent Social Security benefits as well.  Again, every policy is different, so read yours to see whether your insurer has the right to apply this kind of offset.
 
Regardless of what specific offsets might apply in your particular case, you may be surprised to learn that your policy probably gives your insurer the right to estimate those offsets before you even begin to receive them.  Insurers assume that if you are eligible for benefits from them, then you are probably eligible for benefits from other sources, such as Social Security, as well, and will estimate and apply an offset for those benefits as soon as possible.  Sometimes your insurer will give you a choice.  An insurer might ask you if you want it to estimate the other benefits and apply the offset now, or whether you want to wait until you receive the other benefits, and then pay the insurer back.
 
Some states, however, prohibit certain kinds of estimates.  For example, in California, group disability insurers are not allowed to estimate retirement benefits (10 California Code of Regulations Section 2232.45.2), or workers’ compensation temporary total disability benefits (10 California Code of Regulations Section 2232.45.3), and therefore may not offset those kinds of benefits until you actually receive them.
 
In sum, offsets are an important part of a disability benefit plan, as they directly affect, and often substantially reduce, your benefit amount.  However, they can also be very confusing.  If you are concerned that your benefit has been miscalculated because your insurer has not correctly applied the policy’s offset provisions, you should request a detailed calculation in writing from your insurer.  If your benefits are governed by ERISA, as most disability benefits are, you have the right to appeal the insurer’s calculation, and if that appeal is denied, you have the right to bring a lawsuit in federal court.  To maximize your chances of succeeding, you should contact an attorney who specializes in ERISA law before going through the ERISA appeal process.  ERISA imposes strict evidentiary limits, so if you do not present your best evidence and arguments during the appeals process, you may be prevented from doing so later when you get to court.  As a result, it is important to get legal advice as early in the process as possible.
  



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