During the last several weeks it came to my attention that although most claimants are aware they will be required to “give SSDI money back” to their disability insurers, they are completely unaware of the reason why.
One claimant who called last week actually tried to give her retroactive lump-sum back to the insurance company when her policy was “non-integrated” meaning there were no contract provisions for “offsetting” SSDI at all. The information “she read on the Internet” misinformed her.
It is very unwise of claimants not to understand why they are handing over thousands of dollars to their disability insurer, and in fact, should have thoroughly read and understood their disability benefit plan. Therefore, I hope all ERISA folks find this post helpful because it is important to understand all aspects of your disability policy and why the insurer is attempting to collect money from you.
First, there are two types of employer group sponsored disability plans: integrated, and non-integrated. “Integrated” plans contain provisions, which allow the insurance company to reduce benefits for “other monthly income” such as SSDI, worker’s comp, retirement and pension plans. “Non-integrated” policies contain no such provisions.
The definitions of “offset ”are “reduce”, or apply against and reduce.
If your policy contains offset provisions for “Other Monthly Income” then it is an “integrated” policy and allows the insurer to reduce your monthly benefit for other sources of income such as SSDI. If there are no such provisions, insurers may not force you to apply for SSDI, nor are benefits reduced if you do apply and are awarded.
Let’s presume your policy is an “integrated” group Plan and contains provisions allowing your insurer to reduce monthly benefits for primary and family SSDI.
To be clear, the insurer has the contractual right to “offset” benefits from the original date of disability for any sources of additional income listed in the policy. Just because SSA hasn’t gotten around to making the decision yet doesn’t mean the insurer isn’t owed the money once SSA pays benefits for the same period of time.
The problem with SSDI is that it can take up to 6 months for SSA to make decisions. In the meantime, the insurance company is paying “unreduced benefits” while waiting for SSA to render a decision.
Insurers either require or request claimants to “choose” how they wish to be paid by signing a Payment Option Form. Claimants may choose to receive a lower benefit that has been reduced by an estimate for SSDI, or receive 100% of full benefit with the understanding they agree to “payback” any money owed when SSA finally renders a favorable decision.
Unfortunately, claimants never “choose” reduced benefits on the Payment Option Form because they want to be paid, and need, 100% of the benefit. Each family and claim situation is different, but choosing to receive full benefits knowing money will be owed back could be disastrous on so many different levels.
In order to “come out even” when SSDI lump sum money is awarded, more claimants need to “bite the bullet” and opt for reduced benefits if it is likely SSDI will be awarded in the future. This is particularly true if the group policy contains a COLA provision.
Let’s look at an example that may also help you understand.
Claimant Y has a date of disability of January 1, 2011 and chooses to receive 100% benefits on the Payment Option Form. His benefit is $2,000 per month and he receives 100% of his monthly benefit until July 1st when SSDI awards him $1,200 for primary SSDI and $400 for his dependent child.
Insurance companies have standardized how they calculate overpayments. Basically, companies first compute “what we paid”, and then “what we should have paid”. The difference between the two is the amount of the overpayment.
The calculation will look something like this:
What we paid: (Full Benefit)
1/1/2011-6/30/2011 $2,000 x 6 = $12,000
What we should have paid:
1/1/2011-6/30/2011 $2,000 x 6 = $12,000
1/1/2011-6/30/2011 $1,200 x 6= ($7,200)
1/1/2011-6/30/2011 $400 x 6= ($2,400)
Should have paid: $2,400
In other words, if the insurance company had known of the SSDI primary and family benefit approval when it originally began paying the claim on 1/1/2011, it would have immediately paid less. BUT, because the claimant was NOT awarded in January and had to wait 6 months to get SSDI approval, the company paid more benefits than what the claimant was actually entitled to. Therefore, the money is owed back when SSA finally gets around to paying the claimant.
Yet another way of explaining the overpayment is that claimants may NOT receive full benefits AND SSDI for the same time periods. Claimants may not receive 100% of their disability benefit + their SSDI awards. Uncle Sam wants to make sure claimants are encouraged to return to work, instead of making a profit on disability income.
Claimants essentially are in a Catch-22 position. Everyone receiving disability needs 100% of benefits since they are already only receiving 60% of their pre-disability income. Therefore, nearly everyone chooses to receive “unreduced benefits” on the Payment Option Form and worry about the overpayment in the future. Most Americans are quite accustomed to a “live for today” outlook.
The problem of course finally arrives in the form of a lump-sum overpayment when claimants are now in debt and behind in medical bills, mortgage payments etc. and spend the money.
Subsequently, an argument begins between the claimant and the insurance company whether “it’s fair to have to pay the money back”, or “do I really have to pay back the money for my children?” It’s very hard for out of work claimants to let go of $37,000 to an insurance company and very few claimants actually want to repay the money.
The problem of course started way back to the date of application for benefits when claimants opted to receive unreduced benefits while waiting for SSDI to make a decision.
Claimants should think very carefully about their elections on the Payment Option Form and how “paying back” sometimes thousands of dollars will affect the family and family finances. If claimants do not want to pay that kind of money back to the insurer, then opt to receive reduced benefits while waiting for SSA to make a decision.
I hope this post helps claimants understand why they may owe money back to their insurers. It’s not enough to just know you owe the money, but to clearly understand why it’s owed.