Many people who apply for Social Security Disability also apply for Long-Term Disability benefits through a private insurer. While the applications and requirements to receive benefits under these different payers are separate and distinct, the payment amounts are inevitably intertwined. Since most LTD carriers require applicants to apply for SSD benefits concurrently, it is important to understand how this may affect the benefits you receive.
Long-Term disability plans are intended to provide an employee with a set percentage of their pre-disability income. These LTD payments however are generally intended to be a maximum benefit. Social Security disability payments are intended to provide a benefit to citizens who are unable to work but have contributed to the Social Security system. Social Security bases its disability payments not on your income, but on the amount you have contributed to the system. Each year, all workers receive a Social Security Statement. That statement provides information on your contribution amount and what monthly amount you would be eligible for if you became disabled in that year.
LTD plans, as mentioned above, calculate a potential disability payment based on your earnings prior to the onset of a disability. This amount is intended to be a maximum monthly amount and most plans contain an offset provision to ensure this maximum amount. An offset provision means that during a given month, if you receive other income, the long-term disability carrier will reduce your monthly LTD payment by the amount of that income. This will not always include ALL income, so it is important to read your policy. If the LTD policy does provide an offset provision, Social Security Disability benefits are the most common type of income to be offset.
Most LTD plans require a disabled person applying for LTD benefits to apply for SSD benefits at the same time. The two applications are evaluated independently by either the LTD carrier or SSA. Which organization approves your benefits first will affect how the offset provision is applied. If you are approved for private disability benefits before SSD benefits, past due benefits will be paid and monthly checks will be issued for the maximum payment amount. Then, when SSA finds that you are disabled, they will also issue past due benefits. These past due benefits will be paid to cover a particular period of time which will in most cases overlap months for which you received LTD benefits. The LTD carrier then will assess an overpayment charge and you will be required to pay back that amount. The good news however is that the SSA past due benefit amount will likely cover the overpayment your LTD carrier seeks to recover.
For example, if your long-term disability maximum amount is $3,000 a month and you are approved for benefits in June of 2008, dating back to a disability onset of January 2007, LTD would pay $54,000 (18 months @ $3,000/mo) in past due benefits and a continuing monthly check for $3,000 forward. Then, in July 2008, SSA finds that you were disabled beginning January 2007, and after the 5-month waiting period are entitled to $2,000 a month. The past due benefits paid by SSA would be $24,000 (12 months @ $2,000/mo). The LTD carrier would assess an overpayment of $12,000 (12 months x ($3,000-$2,000)). The disabled person would then be expected to repay $18,000 to the LTD carrier.
Alternatively, if the SSA approves a disability prior to the LTD carrier, SSA will pay the full past due benefit amount, as shown above. When the LTD carrier approves the disability, it will reduce the past due benefit amount by the payments previously made by the SSA.
Using our example from above, if in July 2008, SSA finds that you were disabled beginning January 2007, and after the 5-month waiting period are entitled to $2,000 a month. The past due benefits paid by SSA would be $24,000 (12 months @ $2,000/mo). Later, when the LTD carrier approves the disability, the payment calculation would be from January 2007 to July 2008 ((18 months @ $3,000/mo) – (12 months x ($3,000-$2,000) = $42,000).
Offset provisions are common in long-term disability plans and should be read carefully to understand what sort of income affects the monthly LTD payment and to avoid overpayments.