How to Insure Your Income: Social Security Claims
The claims issues relating to Social Security disability income coverage relate mostly to the difficult definition of disability the program uses.
Statistically, only about one in three Social Security disability claimants ever collects benefits. This is true for several reasons.
Eligibility requires the following:
- you have fully insured and disability insured status;
- you are under age 65;
- the disability is expected to last for at least 12 months and/or end in death; and
- you have satisfied a five-month elimination period followed by submission of an application for benefits.
The under age 65 requirement is due to the fact that, at age 65, any disability benefits being paid become retirement benefits. Thus, the disability must begin prior to age 65.
In addition to the age and status requirements, a worker also must satisfy the Social Security definition of total disability. This is defined as:
The inability to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment which can be expected to result in death or last for at least 12 months.
This definition is very restrictive. It obviously eliminates benefits for any short-term disability or a relatively insignificant, non-life-threatening disability.
Generally, an application for benefits will be filed sometime during the fifth month of disability, because there is a five-month elimination or waiting period. Claims applications may be submitted retroactively up to 12 months after the onset of the disability.
The disability must be so severe that a person is unable to engage in any employment that exists in the national economy -- regardless of whether such work is available in the immediate area where the person lives.
In addition to meeting the eligibility requirements of an employee and paying Social Security taxes, eligibility for Social Security benefits is determined by your insured status.
There are basically three forms of insured status:
- fully insured;
- currently insured; and
- disability insured.
The actual disability benefit is equal to your primary insurance amount (PIA). The PIA is based on the average earnings history upon which Social Security taxes have been paid. In addition, the actual disability benefit is affected by your age at the onset of the disability and your dependent status.
Disability benefits may be reduced to offset benefits received from workers' compensation and any statutory disability plan, such as a federal or state disability plan. This reduction in benefits will be made if the Social Security benefits plus the statutory plan benefits exceed 80 percent of your pre-disability average earnings.
Certain benefits are not subject to this offset rule. Veterans Administration (VA) benefits are excluded, as are private pension or insurance benefits.
The summary judgment in the 1995 federal district court case Virginia Rommel v. First Unum Life Insurance Co. dealt with whether or not First Unum could deduct the amount of Social Security disability benefits Rommel received from the amount of benefits it paid to her under a long-term disability insurance policy. Rommel argued that it could not, and this deduction constituted a breach of contract.
In October 1990, Rommel was injured in an automobile accident. At the time, she had been employed by Utica Mutual Insurance Co. in New Hartford, New York, for about 18 years. Her employer purchased long-term disability insurance for its employees from First Unum. Although Rommel briefly returned to work part time in early 1991, she completely stopped working in May 1991.
After exhausting her short-term disability insurance benefits, which Security Mutual paid, Rommel began receiving long-term disability insurance benefits from First Unum in April 1992. She also received benefits from Allstate, her automobile insurance carrier, under her policy's no-fault lost wage and personal injury protection provisions.
Rommel applied for disability benefits from the Social Security Administration. Although Social Security initially denied her claim, it granted Rommel's appeal. In a decision dated June 1992, Social Security awarded Rommel total disability benefits retroactive to May 1991. She received an award letter from the agency in mid-July 1992.
After Rommel began receiving Social Security benefits, each of the insurers deducted the Social Security benefit amount from the amount of money it was paying her under its respective policy. The insurers also demanded reimbursement for certain benefits they overpaid between May 1991 and June 1992, because the retroactive Social Security award covered that period.
Rommel attempted to resolve the dispute through arbitration in early 1993, but only Allstate participated in the proceedings. She subsequently commenced a lawsuit in New York State Supreme Court in October 1993.
Rommel requested a declaratory judgment to determine what benefits each insurer should pay her. She also claimed that the offsets of her Social Security benefits by First Unum and Allstate breached her insurance contracts. Security Mutual raised a counterclaim against Rommel for reimbursement of $3,599.34 in benefits paid that should have been offset by Rommel's Social Security benefits.
First Unum removed the action to federal court on January 5, 1994. In its motion for summary judgment, First Unum contended that Rommel's state law claims against it were pre-empted by the Employee Retirement Income Security Act (ERISA).
Rommel argued that pre-emption was inappropriate because "there is absolutely no language concerning my rights under ERISA as alleged [by the defendant]." However, the versions of the policy provided to the court by Rommel and First Unum each contained identical cover pages with an explicit reference to ERISA. Further, the court determined the trigger for ERISA pre-emption generally is:
a state law or cause of action having "an effect on the primary administrative functions of benefit plans, such as determining an employee's eligibility for a benefit and the amount of that benefit."
Since Rommel's state claims related to the calculation of her long-term disability benefits, the court concluded that they were pre-empted by ERISA.
The court pointed out:
ERISA does not mandate particular benefits, but instead "governs plan operations, provides rules of fiduciary responsibility and sets forth disclosure requirements to further ERISA's policy of protecting the interests of plan participants in the benefits that employers do elect to provide."
Section 1132 of ERISA provides that a plan participant or beneficiary may bring a civil action "to recover benefits due to him under the terms of his plan, ... or to clarify his rights to future benefits under the terms of the plan." A plan participant or beneficiary also may bring a lawsuit under ERISA "to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan." Finally, ERISA provides a cause of action for breach of fiduciary duty.
At this point, First Unum contended it was entitled to summary judgment because the policy language unambiguously permits the insurer to set off Social Security benefits from long-term disability insurance payments. In the alternative, First Unum contended that Rommel's claims must be dismissed as premature because she failed to exhaust required administrative remedies.
Rommel responded that First Unum breached its fiduciary duty to her under ERISA.
While Rommel complained that it was improper for First Unum to offset her Social Security disability benefits from the amount of benefits the insurer paid her, the court found that "under the clear language of the First Unum policy, such deductions are permissible." Thus, the court determined that Rommel was not entitled to greater benefits from First Unum, and the insurer's actions did not violate the terms of the plan -- nor did they breach any fiduciary duty by implementing the plan language.
Rommel's lawyers argued that imposing the offsets was unfair in Rommel's "particular situation." But the court didn't agree:
... Just as ERISA does not mandate the provision of specific benefits, the statute does not require plan fiduciaries to renegotiate plan benefits on an individual basis. Moreover, it may be a fiduciary breach if administrators treat beneficiaries differently from one another....
The court decided that summary judgment was appropriate on these grounds, and granted it.
