The Social Security Offset

This is a companion to two other pieces on this site, Disability Insurance Basics and A Pragmatic Look at Filing a Disability Claim. They're long and there's some duplication, but if you're looking at disability you won't regret reading them. You might want to print out all three and read them in bits and pieces.

The following is a discussion of one of the most contentious issues connected with disability insurance, the practice of offsetting disability payments from government programs like Social Security against benefits paid by group disability insurance. Many people think they'll receive both SSDI and group LTD benefits, and are shocked to find different. Read on:

The Group LTD Offset Issue

Group LTD policies typically include offsets for Social Security Disability Income, Supplemental Security Income, state sickness programs, veterans’ benefits, private pensions and the like. There are seven things to say about offsets, and this posting is going to say them. I discuss the issue mainly in the context of SSDI, but the list of offsettable (a/k/a "deductible") sources of income usually includes all government programs, i.e., Workers Comp, and any pension plans private or public. One thing that’s not usually offsettable is benefits from privately-purchased individual disability insurance policies. Those benefits are typically paid irrespective of any other sources of income, and I’ve never heard of a government program or a Group LTD policy that reduces its payments on account of individual D.I. benefits.

What I have to say is on the blunt side, but I think it’s accurate. The fact that on this set of issues I'm on the side of the insurance carriers does not mean that I'm their p.r. guy. Fair's fair, and when it comes to offsets they are in the right. And for those who say that the insurance agent "told" them otherwise, well, I hope you’ve either got it on videotape or it was said in front of a whole lot of witnesses who were taking notes. Otherwise, what you were "told" + $1.50 will get you a tall coffee of the day at Starbucks.

First, your policy is a contract and its language governs. It's not about what you think is "reasonable" or "right." The insurance carrier is not your mom or dad or friend or minister or social charity or dispenser of truth, justice and the American way. The insurance carrier is a company that collects premiums and pays claims according to the terms of a contract known as an "insurance policy." It's about the contract. I say this so emphatically in hopes of heading off a bunch of wailing about the unfairness of it all.

People who don't like offsets can buy supplementary individual coverage. You never read that disability booklet they gave you when you were hired so you didn't know about any of this, you say? Not to put too fine a point on it, but whose fault is that, anyway? Of course, now it's too late for you to buy supplementary coverage, but it's not too late to tell your kids and your friends to read their disability booklets and think about supplementary coverage for themselves.

Second, if you do not have the contract language in your possession then you owe it to yourself to obtain it. You can do this by sending a certified letter to your former employer. Ask for a copy of the "certificate and summary plan description" of the disability coverage in effect at the time you became disabled. The SPD will answer the offset question, and just about every other question about the policy. In spite of my having just referred to that little booklet they gave you when you hired on, it is not adequate at this point. You need the SPD. You employer must provide it on request, so get it. Now.

Third, the typical employer-based LTD contract will offset for benefits provided by SSDI. The insurance company typically does not offset for cost-of-living increases provided by government programs, but it typically does offset government benefits (before any COLAs) provided to you and your children on account of your disability. From the insurance company's point of view, it doesn't matter whether the government pays you, your children or your dog, for that matter. As long as the government makes those payments on account of your disability, then all of those payments (including the kid's and dog's) are offsettable under the typical employer-based LTD contract. Like it or not, it's about the contract, remember? If you're thinking about how unfair it is, please see point #1 above.

"F" is for Fourth and for those F-ing lump-sum reimbursements. This is when, as a condition of being paid LTD, you apply for SSDI and eventually get a big check from the government representing back pay to the date of your disability. Your group policy says you've got to send that money to the insurance company. To add insult to injury, they call their past benefits an "overpayment," which I think just might be a plot to drive people to have strokes and heart attacks so they can quit paying you! What's next, a request to regurgitate the last two years of dinners because they were overconsumed with the overpayments? Sheesh!

Once you've climbed down from the ceiling about repaying the rich bastards at the insurance company, you might wonder whether, since SSDI is taxable, you'll be taxed on the lump sum that you never got to spend. By and large, the answer is no. Go to the IRS website and find Publication 915. If you use an accountant to do your taxes, mention it to that person. It gives all the details, but the short version is that the amount you pay back is usually fully deductible from your taxable income so it will probably be a wash as far as taxes go.

Fifth, if you had to hire an attorney to get the SSDI ruling, the insurance company typically pays the fee. The SSDI lump-sum will typically come to you net of the attorney's fee. In such cases, you pay back only the net award, which means the insurance carrier pays your attorney's fee. I say "typical" because there are some wrinkles, for example if you use a non-attorney representative or if you choose a lawyer that your insurance company won’t pay for. All of these things are discussed in the contract, which is yet another reason to get a copy of your SPD.

Sixth, even though the insurance carrier takes the lump sum, filing for SSDI was definitely in your interest. Let us count the ways. For starters, the insurance carrier usually doesn't take the cost-of-living increases, and over time those add up. Also, after two years on SSDI you become eligible for Medicare, which is a major benefit to people with chronic illnesses. And when you become eligible for SSDI, your Social Security retirement benefit calculation is frozen retroactively to the date of your disability. This stops the government from counting you as "unemployed" and cutting your future retirement benefits, which can make a huge difference over time. Bottom line: Just because it was in the insurance company's interest that you get approved for SSDI doesn't mean that it was a pointless exercise for you. Quite the contrary!

Seventh, I believe that your insurance company can't actually force you to write a check for the equivalent of your SSDI lump sum. The insurance carrier will ask you to write the check, or even to authorize an electronic debit from your checking account. Unless you have reason to believe they're going to cut off your benefits I generally think you should do so. But if push comes to shove, I believe they are limited to stopping your future benefits (often there's a minimum monthly amount that they'll still have to pay you no matter what, but it's typically a pittance) until the amount of your SSDI lump-sum has been fully paid off. However, the case law varies throughout the country, so before you rely on what I've just written you must check with an expert!

I am told that the retroactive repayment issue has recently become a hotbed for litigation. The issues are not only whether or not your carrier can require you to send them a check, but also whether it's legal for them to offset Social Security payments (both past and ongoing) made to dependents on account of your disability, even when it's in the contract. The cases get way into the tall grass, involving stuff like subrogation, actuarial data, state insurance commissions and astrological tables.

Caryn Montague will forget more than I will ever know about these issues. Besides being the moderator of the outstanding and invaluable Disability Insurance Forums website, she is a non-attorney disability claims consultant with a long and impressive background of insurance industry experience, knowledge and contacts. If I needed to know the latest scoop, she's where I'd turn.

And if you have a high tolerance for legalese, you could check this site or this site to see just how much ferment there is. However, I really caution people not to try to "play lawyer" on this stuff. When it comes to these issues, I am a very emphatic advocate of finding expert help. Wisdom is often a matter of not just knowing what you know, but of knowing what you don't know, and being willing to get help.