Since so much attention is placed on earnings and income that by contract provision can be offset (subtracted) from private disability benefits, I thought an article on income NOT offset from benefits might be interesting.
Although most insurer provisions basically name the same items, let’s use Unum’s provision as an example. See blow.
WHAT ARE NOT DEDUCTIBLE SOURCES OF INCOME?
Unum will not subtract from your gross disability payment income you receive from, but not limited to, the following:
- 401(k) Plans
- Profit Sharing Plans
- Thrift Plans
- Tax Sheltered Annuities
- Stock Ownership Plans
- Non-Qualified Plans of Deferred Compensation
- Pension Plans for Partners
- Military Pension and Disability Income Plans
- Credit Disability Insurance
- Franchise Disability Income Plans
- Retirement Plan from another Employer
- Individual Retirement Accounts
- Individual Disability Income Plans
- No Fault Motor Vehicle Plans
- Salary continuation or accumulated Sick Leave Plans
Although 401(k) plans are quickly disappearing from the workplace, when offered in combination with ERISA group disability Plans, future distribution funds are not offsets from disability benefits. This is great news for employees who can “defer” taxes on 401(k) contributions while still employed, but avoid offsets from benefits if disabilities occur requiring distribution of 401(k) retirement after the age of 55.
The worst possible option for employees is when employers have “qualified employer defined contribution plans” in place. Most private disability insurers offset under a provision that says something like, “Retirement benefits will be those benefits which are based on your employer’s contribution to the retirement Plan.”
Depending on contract or Plan language mistakes can be made by allowing insurers to offset “qualified defined benefit plans” when the exact language refers to defined employer contribution plans.
Profit sharing plans refers to a Simplified Employee Pension Plan (SEP) allowing extremely high contributions (25% of compensation or $54,000 in 2017). Only employers can contribute to SEP Plans, but as a general rule distributions from SEP plans are not offsets from disability income.
Thrift Plans (TSP), or Thrift Savings Plans are the 401(k) equivalent for federal employees. Those covered by ERISA Plans would have to be withdrawing TSP retirement funds from a prior employment with the federal government. TSP funds can be rolled over to a new employer’s Plan or IRA. In either case, TSP and IRA distributions are not reductions in private disability benefits.
An example of a tax-sheltered annuity (TSA) is the 403(b) plans offered by public schools and certain charities. Money can be deferred from salary into individual accounts.
Stock Ownership Plans (ESOP) are qualified defined contribution employee benefit Plans (ERISA) designed to allow employees to invest in the stock of the sponsoring employer. These are retirement plans wherein employees “own the company” for retirement purposes.
Non-qualified plans of deferred compensation as it relates to benefit offsets included things such as cashing in CDs, annuities, mutual funds, money market certificates and removing savings. You may not have thought about all that is relation to disability offsets, but everyone should be relieved that this income is excluded specifically in disability Plans.
Of course, a non-qualified compensation plan can also refer to any Employer agreement to pay employees or independent contractors money earned in one period and paid in another.
Although only employers can set up pension plans, any retirement plan income from partner plans are not subtracted from benefit income. Military pension and disability income Plans are self-explanatory and are not deducted from private disability income.
Proceeds from credit disability insurance payments are also not offsets. Franchise disability income plans are retirement plans for small groups of employees – also not an offset from disability benefits.
Retirement plan from another employer – Yes! Retirement plans from previous employers are not reductions from disability income. Income from previous employer plans should be separated from all plans existing from a current employer, including all paperwork proving where the money came from even if it was rolled over.
Income from IRA (Traditional or ROTH) are not offsets from benefits. This is another great option for those with Group LTD Disability Plans. IRA withdrawals may begin at age 59 1/2 without IRS penalty, nor are these distributions offset from LTD benefits.
Individual disability income plans, or policies you buy yourself separate from any employer are not offset when you receive benefits. This means what while you are also receiving group LTD benefits you may also receive DI benefits that are not offset on the group policy. Great news. Those who can afford to buy DI insurance while still employed receive great advantage – DI benefits are not taxable and are not offsets from group Plans.
No-fault motor vehicle plans often called PIPs (Personal Injury Protection) are required by the following 15 states: AK, DE, FL, HI, KS, MD, MA, MI, MN, NJ, NY, ND, OR, PA and UT. Insureds can opt out of PIP insurance in WA and TX. PIP claims are those made against one’s own automobile insurer for medical bills and lost earnings “no fault” coverage.
Finally, most but not all group Plans include salary continuation and accumulated sick leave Plans on the “no offset” list. This becomes very important when severance contracts are issued and how employers define additional future income.
The purpose of this article is to give you a brief explanation as to what each “non-offset item” was as described in most group Plans. There is a great deal of additional information available on the Internet for each of the above items that will help you decide from a planning perspective as to the amount of income available to you in case of disability.
This article is probably of most importance to those receiving LTD benefits long-term and reaching retirement distribution age as well as those who are planning for the future and want to maximize disability income.