Coordination of Benefits for Social Security Disability Clients: ERISA and Long Term Disability

I. Introduction Many people who become disabled file claims for both social security benefits and for benefits under long term disability policies provided by their employers. In order to best advise your client, an attorney who handles either type of case should have a working understanding of how the two benefits are coordinated.

II. Long term disability benefits usually are offset for social security benefits.

Most LTD policies are written so that the insurance company gets to take advantage of the favorable social security decision, by offsetting the social security benefits. Often, insurance companies attempt to recover our clients’ back benefits, when they are awarded social security disability benefits.

Most of our client are covered under LTD policies provided at work, and most of those claims are controlled by the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. 1001 et. seq. If your client purchased the policy directly from an insurance company, or if your client’s employer was a church or government entity, then any claims under the policy are governed by state law.

A. Calculating the benefits and overpayments.

1. How LTD benefits are normally calculated.  In most LTD cases, if a person is disabled, the disabled person is paid a percentage of his or her pre-disability wage. This percentage varies from policy to policy, but is often around 60%.

The LTD benefit is then further reduced by social security benefits, and other income, such as workers’ compensation.

For example: If you client made $24,000 per year before becoming disabled, her pre-disability income was $2000 per month. If her LTD pays 60%, her gross monthly LTD benefit would be $1200. If she also wins her social security benefits, and her PIA is $900 per month, her net LTD benefits are only $300 per month.

If the same client also receives workers’ compensation benefits or other disability benefits, the LTD policy may offset for those benefits as well, which reduces the LTD benefits to $0, or, in many cases, to the minimum under the policy (often $50 or $100).

Many policies also state that the insurance company may offset for the auxiliary benefits. The typical language will state whether the offset is “primary” or “family;” if the policy offsets for “family” benefits, then the client’s benefits paid to dependents (or auxiliaries, as Social Security refers to them) will be offset by all the benefits paid for under the client’s account, including benefits paid to dependents.

If the client is awarded social security benefits shortly after becoming disabled (a rare occurrence!), then the LTD insurance company will reduce the amount paid from the beginning, and only pay the difference. If your client is first paid the full amount of LTD benefits, then is later awarded social security benefits, the insurer will not only reduce the ongoing LTD benefits into the future but may try to collect back from the client the amount they were paid in social security benefits.

2. How overpayments are ordinarily calculated.

Often, your client is paid LTD benefits soon after she stops working, while her social security claim is still pending. Most LTD policies allow the insurance company to retroactively offset for the social security benefits that are later awarded. For example, if a person has been paid LTD benefits of $1200 per month for ten months, then is awarded social security benefits of $900 per month for the same ten months, the insurance company will ask your client to pay back the social security benefits, because your client should have only received $300 per month.

B. An insurer’s or Plan Administrator’s right to recover an overpayment under ERISA.

Most insurance companies include a provision in the policy that allows the insurance company to sue the disabled person to recover any LTD benefits that were overpaid, once the disabled person receives back-benefits from social security. However, if your client’s LTD policy is provided through work, and your client’s employer was not a church or government entity, then the insurance company’s claim is preempted by ERISA, and, under ERISA, they may not have any right to recover your client’s back benefits. The short answer is that, if the LTD benefits are provided through an ERISA plan, the insurance company may be able to offset benefits going forward and may recover an overpayment out of the remaining benefits, but probably cannot sue to recover the overpayment and collect money back from the client.1. Step 1-determine if it is an ERISA plan.

ERISA applies in almost every case involving benefits provided by an employer. Courts have interpreted ERISA’s preemption provisions very broadly, such that ERISA preemption has been referred to as “super preemption.” For example, ordinarily, determining whether a particular case arises under federal law turns on the ” ‘well-pleaded complaint’ ” rule, looking only to those claims raised in the Plaintiff’s allegations. Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 9-10, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). Also, the existence of a federal defense does not provide Federal Court jurisdiction, Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908), and “a defendant may not [generally] remove a case to federal court unless the plaintiff’s complaint establishes that the case ‘arises under’ federal law.”

Franchise Tax Bd., supra, at 10, 103 S.Ct. 2841. As the Supreme Court recently reaffirmed, ERISA’s preemption is so broad, it is an exception to those rules:

“[W]hen a federal statute wholly displaces the state-law cause of action through complete pre-emption,” the state claim can be removed. Beneficial Nat. Bank v. Anderson, 539 U.S. 1, 8, 123 S.Ct. 2058, 156 L.Ed.2d 1 (2003). This is so because “[w]hen the federal statute completely pre-empts the state-law cause of action, a claim which comes within the scope of that cause of action, even if pleaded in terms of state law, is in reality based on federal law.” Ibid. ERISA is one of these statutes.

Aetna Health Inc v. Davila, ___ U.S. ___, ___ S.Ct. ___, 2004 WL 1373230, slip op. p. 5 (2004) (Holding that a Texas state law, allowing a participant in an employer sponsored HMO to sue the HMO for damages if the HMO unreasonably denied coverage, to be preempted by ERISA.) Most Courts have held that a claim by a plan administrator to enforce the terms of an ERISA plan is preempted by ERISA.[1] ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” ERISA 514, 29 U.S.C. 1144. However, by statute, ERISA does not apply to governmental employees, or to church employees, unless the church “opts in” to ERISA. ERISA 4, 29 U.S.C. 1003.

If ERISA does not apply to an insurance company’s claim, then ordinary state contract law applies, and the insurer may recover the benefits to the extent permitted by state law (except as prohibited by social security’s anti-assignment provision. 42 U.S.C. 407, discussed below).

2. Step 2: if it is an ERISA plan, determine whether the insurance company or plan administrator can recover under ERISA.

Congress, in passing ERISA, “set forth a comprehensive civil enforcement scheme” that included Congress’s choice to allow certain remedies related to employee benefits plans and to prohibit others. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54, 107 S.Ct. 1549 (1987). The Supreme Court addressed what remedies were available to an ERISA plan administrator in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S.Ct. 708, 151 L Ed 2d 635 (2002), a case that changed the landscape of the ability of an ERISA LTD plan to seek and pursue claims for the recovery of money properly paid in the first instance from an ERISA beneficiary. Great West paid over $411,000 to medical providers treating injuries sustained by Janette Knudson. Ms. Knudson also sued Hyundai on a products liability theory for her injuries. Ms. Knudson settled with Hyundai for $650,000, allocating as part of the judicially supervised settlement a little more than $13,800 to repay Great West for its plan created a lien on her personal injury claims. Great West sued for recovery of the entire amount of its lien, refusing to negotiate the check payable to it pursuant to the terms of the judicially supervised settlement. The Supreme Court held inter alia that ERISA did not permit Great West to pursue a legal remedy to enforce the terms of the plan. Great-West Life, 534 U.S. at 220-221 citing 29 U.S.C. 1132(a)(3) (ERISA 502(a)(3)). The Court’s rationale rested on the form of restitution sought by Great West, a money judgment from undifferentiated assets of Ms. Knudson. Because that action is classified as “legal” rather than “equitable” the limited grant of authority given to plans and their fiduciaries by 29 U.S.C. 1132(a)(3) deprived Great West of a cognizable theory of equitable relief under ERISA. The majority opinion, written by Justice Scalia, clearly states the law:

We have observed repeatedly that ERISA is a “‘comprehensive and reticulated statute,’ the product of a decade of congressional study of the Nation’s private employee benefit system.” Mertens v. Hewitt Associates, 508 U.S. 248, 251 (1993) (quoting Nachman Corp. v. Pension Benefit Guaranty Corporation, 446 U.S. 359, 361 (1980)). We have therefore been especially “reluctant to tamper with [the] enforcement scheme” embodied in the statute by extending remedies not specifically authorized by its text. Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 147 (1985). Indeed, we have noted that ERISA’s “carefully crafted and detailed enforcement scheme provides strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.'” Mertens, supra, at 254 (quoting Russell, supra, at 146-147).

In sum, Great West stands for the following proposition: If an insurance company or other ERISA Plan Administrator provides benefits under the plan that is preempted by ERISA, and the administrator is seeking to recover from a beneficiary of the plan, the only cause of action available to the administrator is one found in ERISA. Under ERISA, the only cause of action available to the administrator is ERISA 502(a)(3), which limits remedies to “equitable” remedies. The Supreme Court held that “equitable remedies” were the narrow set of remedies available in a court sitting in equity prior to the merger of equity and law courts. Thus, if an administrator is seeking to enforce the term of an insurance policy or similar document, the administrator is really seeking to enforce a contract, which is a cause of action at law, and not available under ERISA. However, the Court reserved the question whether or when equitable remedies are available to an administrator.

Generally speaking, an insurance company or plan administrator cannot make your client turn over his or her back social security benefits but can engage in self-help by applying an “equitable right of offset” and by reducing you client’s future LTD benefits.

C. Lower Court Rulings Since Great West

1. Many courts hold that the insurance company may not recover an overpayment from a beneficiary at all.In Qualchoice, Inc v. Rowland, 367 F.3d. 638 (6th Cir. 2004), the Court of Appeals for the Sixth Circuit held that, when a Plan Fiduciary seeks to enforce the terms of an ERISA plan, that is a cause of action to enforce the terms of a contract under ERISA, and, as such, is a cause of action at law, for which there is no equitable remedy. Therefore, even though the cause of action is preempted by ERISA, there is no cause of action available for the Plan Fiduciary under ERISA. Id at 650 and 651. Thus, any claim by a plan administrator to enforce the terms of a plan is both preempted by and prohibited by ERISA. Because there is no cause of action that provides the Plan Fiduciary a remedy, the Sixth Circuit held there is no cause of action over which the Federal Court has jurisdiction, either, and the claim must be dismissed. See also Community Health Plan of Ohio v. Mosser, 347 F.3d 619 (6th Cir. 2003) (an insurance company sought to recover from a plan participant the money that had been paid toward medical expenses after settlement of the lawsuit. The Court of Appeals found that “CHPO, like Great-West in Knudson, does not seek equitable relief, but rather ‘seek[s] legal relief–the imposition of … liability on respondents for a contractual obligation to pay money.’ ” Id at 623.)[3]

2. Some courts have allowed the insurance company or administrator to obtain an “equitable remedy” by imposing a constructive trust on the assets or other remedies.

In a case currently pending before the Supreme Court, Sereboff v. Mid Atlantic Medical Services, Inc., No. 05-260, U.S. Sup, on appeal from the Fourth Circuit’s decision at 407 F.3d 212 (4th Cir. 2005), the Court of Appeals for the Fourth Circuit focused on the second part of the Great West decision, and determined, that where money was held in trust and was specifically identifiable funds, then the equitable remedy of a constructive trust could be used to recover the funds. But, applying the “constructive trust” concept to a case where the assets sought are social security benefit is probably a violation of 42 U.S.C. 407, which precludes assignment of social security benefits to a third party. If the particular benefits are still identifiable, then the money is identifiable as social security benefits, which may not be assigned. Once the benefits have been deposited in the bank, the funds may lose their character as social security benefits and merely become money, in which case, they are not “identifiable funds,” which is a prerequisite for a constructive trust. Even before Great West, Provident Life and Cas. Co., Inc. v. Crean, 804 So.2d 236 (Ala. Civ.App. 2001) found that an insurance company had no right of action to recover Social Security benefits based on the anti-alienation provisions of 42 U.S.C. 407.

D. Advising your client under ERISA

Before advising your clients about these issues, the author would like to point out that this is a developing area of the law, with conflicting holdings from different circuits, and even within the same circuit. And, even where the law is clear, ERISA administrators and insurance companies often still file suit to attempt to recover benefits. Until the dust has settled, proceed with caution in advising clients whether they could prevail in a claim by a plan or carrier to recover the overpayment created by the retroactive payment of Social Security disability benefits.1. What if your client is receiving LTD benefits and then is awarded back-pay and ongoing Social Security benefits.

Assuming the LTD plan is providing benefits, and not contesting your client’s disability, the advice you give your client should be different, depending on whether your client will receive more benefits from the LTD plan in the future or whether the client will have more money if they keep the back social security benefits and give up the future benefits.

a. If you client’s future LTD benefits are large enough that, over time they will be paid more under the LTD plan even after refunding the amount of social security benefits. In this case, even though the law may support your client’s position that he or she should not have to turn over the social security back pay, nothing prohibits the insurance company from stopping the payment of ongoing LTD benefits. In this case, you can advise your client to take the path of least resistance, and turn over the social security money, and continue getting their full LTD benefits. However, the risk in doing that is that if the LTD carrier decides your client is not disabled, you client could have come out better in the long-run by keeping the money and letting the insurance company offset ongoing LTD benefits.

It may be good advice, even in this scenario, to advise your client to hold on to the social security money; however, prudence suggests that you negotiate with the LTD carrier, to get them to agree to withhold current benefits to recover the “overpayment.” If you merely advise your client to keep the money, without negotiating the method of payment, the insurer may still sue your client to recover the benefits; even though the insurer should lose, your client still has to pay an attorney to defend him or her in an ERISA case.

b. If you client’s future LTD benefits are so small, they get more money by keeping the back social security benefits.

In this case, you probably are safe advising your client to keep the social security benefits and to refuse to refund the money to the insurance company. But, you should advise your client that the insurance company may try to sue to recover the benefits, anyway, even though the insurance company may not prevail.c. Consider the tax consequences to your client.When advising your client what deal to make with the insurance company, you should also take tax considerations into account. If the LTD benefits represented taxable benefits and the social security benefits remain non-taxable because of insufficient other income, your client may be better off keeping the social security. Thus, you client should seek tax advice to determine if your client is better off asking the LTD plan to withhold benefits to recover the overpayment.

d. If your client’s LTD benefits have been cut off.

If your client’s LTD benefits have been denied, you certainly do not want to advise your client to turn any money over to the insurance company. Furthermore, the fact that the insurance company is attempting to recover the overpayment for social security may be used as evidence that LTD carrier was wrong in denying ongoing benefits.

Where a claimant receives social security benefits that created an overpayment against LTD benefits and the LTD plan ceases benefits that the claimant in good faith believes should continue, it appears imprudent to return those funds to the LTD plan. Counsel should advise the client according to the “tracing” cases and invite the LTD plan to credit the overpayment against “future” benefits. Any litigation over the entitlement to ongoing LTD benefits will face a claim for credit against any benefits owed and possible a counterclaim.

e. Ensure the offset is only the net benefits received.

If the insurer is offsetting future benefits or attempting to collect past-due benefits, make sure that the insurer is only offsetting the net social security benefits, after attorneys’ fees. Some ERISA plans or insurance policies specifically offset only the net benefits. Many also do not offset for cost-of-living increases.

If the Plan does not give credit for attorneys’ fees, you may still argue that, by pattern and practice, an insurer has a policy of offsetting only the net benefits.


In sum, if the insurance company or ERISA plan administrator wants to stop paying benefits to your client, and apply the benefits toward the overpayment, the insurer can do that using their equitable right of set-off. If the insurer tries to sue your client to collect the money now, you can argue they have no such cause of action under ERISA; however, the bad news is that your client still has to defend the suit. Additionally, if the funds are specifically identifiable as social security funds, the insurance company cannot attach those or get a judgment to recover those under 42 U.S.C. 407.he Ninth Circuit recently held to the contrary in Providence Health Plan v. McDowell, 361 F.3d 1243 (9th Cir. 2004) (holding that a state law claim for reimbursement by a plan against a beneficiary can survive ERISA preemption). The author submits this case is contrary to the overwhelming majority of cases holding ERISA preempts these claims, including the Ninth Circuit’s prior decision in Westaff (USA) Inc. v. Arce, 298 F.3d 1164, 1167 (9th Cir. 2002), cert. denied, 537 U.S. 1111 (2003). However, more recently, the Ninth Circuit affirmed the exclusion of a federal remedy for reimbursement in the ERISA context. Carpenters Health and Welfare Trust v. Vonderharr, ___ F.3d ___ (9th Cir. September 15, 2004).

At the time this paper was written, the Supreme Court had recently heard arguments in the case of Sereboff v. Mid Atlantic Medical Services, Inc., No. 05-260, U.S. Sup, on appeal from the Fourth Circuit’s decision at 407 F.3d 212 (4th Cir. 2005). By the time of the presentation, hopefully, the Court will issue a decision addressing whether an ERISA fiduciary may recover from a participant under an equitable theory under ERISA 502(a)(3).

A more recent case out of the Sixth Circuit, Primax Recoveries, Inc. v. Gunter, 433 F.3d 515 (6th Cir. 2006), held that, where a fiduciary brings a claim to recover an overpayment under the terms of the plan, such a claim is an action at law, which is not permitted under ERISA. However, because the court has subject matter jurisdiction under ERISA in general, a party may seek attorneys’ fees under ERISA 502(g) for successfully resisting a claim by an ERISA fiduciary. It is not the purpose of this discussion to give tax advice to counsel or to clients. The issue having been raised requires more research into the particular facts and circumstances presented. A counterclaim would probably seek a legal remedy absent evidence for tracing the social security benefits to an existing res. Absent evidence of tracing, a counterclaim for reimbursement based on a constructive trust should face a motion for summary judgment. A plain claim for reimbursement should meet with a motion to dismiss.

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