The interplay of long-term disability and Social Security Disability insurances
December 28, 2017
By Shelley W. Elovitz, Esq.
Your Long-Term Disability (LTD) Insurance may cause an overpayment of Social Security Disability
Many employers provide health insurance, life insurance, and Long-Term Disability (LTD) insurance to their employees. When LTD insurance is provided through an employer, it supplements Social Security Disability Insurance (SSDI). LTD benefits are typically paid as a percentage of a person’s pre-disability earnings. However, LTD policies are usually reduced by the Social Security Disability Benefits. Most of these plans contain terms that allow the disability insurance company or plan administrator to recover benefits that have been “overpaid.”
If the disabled person is first paid Long-Term Disability benefits and then later wins Social Security benefits, Employee Retirement Income Security Act (ERISA) policies allow the disability insurance company or self funded ERISA plan to recover the “overpayment.” An overpayment may result when the full amount of LTD benefits is given upfront but a later award of social security disability means that a lower amount of LTD should have been paid. Some policies give the employee the option of taking the reduced payment (when calculating the theoretical social security monthly award) or taking the full monthly disability amount which could result in a larger “overpayment”.
Offsets are typically calculated as follows: the amount of the Long-Term Disability benefit is a percentage of the disabled persons’ pre-disability wage (this percentage varies from policy to policy but it is often approximately 60%). The LTD benefit is then further reduced by Social Security benefits and any other income, such as workers’ compensation.
For example, if the disabled person earned $24,000 per year before becoming disabled, his or her pre-disability income was $2,000 a month. If his or her Long-Term Disability pays 60%, the gross monthly LTD benefit would be $1,200. If the disabled employee won his or her Social Security benefits and the primary insured amount (what would be received on a monthly basis) is $900 per month, the net LTD benefits would be reduced to $300 per month.
Consequently if the disabled employee is paid $1,200 per month for 24 months and then later wins the Social Security benefits of $900 per month, the disability insurance carrier will seek to recover the $21,600 (24 x $900) that the person was overpaid.
It is Rothman Gordon’s opinion that most people fortunate enough to have employer sponsored Long-Term Disability benefits should opt for the lesser monthly amount so as to not be in the unenviable position of paying back the larger overpayment. (Please also see Shelley Elovitz’s previous article entitled How Long is the Long in Your Long-Term Disability Benefits).