LTD Benefit Question

[Christine Roberts]

Have any of you "backed into" the terms of a private retirement benefit for an executive, in such a way that the existence of the private retirement plan would not result in offset of long term disability benefits to the executive.

Employer in question is not-for-profit, and the private retirement benefit would likely fall under Code Section 457(B).

[KIP KRAUS]

Christine:

Typically group LTD plans do not offset LTD benefits with private disability insurance and I’m almost positive that a private pension plan would not be offset either.

The LTD certificate/policy should describe the types of plans that offset benefit payments.

They also typically do not offset employer pension plans.

[Christine Roberts]

Kip, thanks for the response. The policy in question does not exclude benefits from most employer sponsored qualified plan. This is a particular situation where the individual is going to work for a not for profit organization ("NFP org") and the only existing plan is a deferral only 403(B) plan.

The NFP org can only pay the individual a relatively small amount without incurring offsets from his disability benefit. In order to make up the difference between his artificially reduced salary, and what he would ordinarily earn, they would like to institute a private pension arrangement for him.

Problem is, the only way I know how to do this for a NFP org is through a 457(B) plan, and the LTD policy appears to offset, from the disability benefits, amounts that represent deferred salary (other than 401(k)/403(B) contributions).

Let me know if you have any comments; I am also going to post to Carol Calhoun as she specializes in the NFP/governmental area.

Thanks.

[KIP KRAUS]

Christine:

I am assuming from your last post that this individual is disabled and receiving disability payments already, but is going to go back to work for NFP Org.? Does the LTD carrier know what he intends to do?

I’ve never read any offset provisions that seem to offset for any differed compensation plans, but I’ve never looked for them in any such circumstance. Can you e-mail of post the offset provisions written in the LTD plan? Maybe if I read them I could answer your questions.

[Christine Roberts]

Kip, realizing you are going to have to take a flyer on this, here goes...

The LTD policy pays a "Schedule Amount," minus an "Offset Amount."

A cap on salary is built in to the "Schedule Amount" definition.

Offset Amount is defined to include benefits (whether retirement or disability benefits) from "Retirement Plans" that are derived from employer contributions to such plans (but excluding employee contributions).

"Retirement Plans" is defined to EXCLUDE the following:

a) a plan the insured pays for entirely

b) a qualified profit sharing plan

c) a thrift plan

c) an IRA

d) a TSA

e) a stock ownership plan

f) a government plan, or

g) a 401(k) plan.

The insurer has glossed this slightly by stating in writing that the policy does not allow the insured to "waive salary in lieu of all compensation going into an employer funded retirement plan. If a portion of your salary goes into the retirement fund, those funds will be construed as your contributions and may be an offset to your LTD benefits as defined above."

Because of the exception made for any type of qualified plan, I am presuming the insurer meant to limit its exclusion for nonqualified deferred compensation types of arrangements, where the employee agrees to reduce salary (so as to avoid a salary offset of the benefit) and received deferred compensation instead.

[KIP KRAUS]

Christine:

You may be able to argue that because a plan paid for entirely by the insured is an excludable from offsets. If an employee is allowed to differ income to say a 401(k) plan and have that plan not offset benefits then how does the LTD carrier conclude that waived salary in lieu of all compensation going into an employer funded retirement plan would be an offset? Would 50% of waived salary going into the plan be an offset? I would also argue that even though the insurer provided its interpretation, in writing , of waived salary in lieu of compensation that if this provision is not clearly defined in the policy/certificate they should be called on it.

On the other hand, I can see the carriers point. The LTD recipient could be deemed to be double dipping from their perspective. If, however your client is being paid under a “his on occupation” basis, they may not be able to offset his benefit for a position not in his regular occupation during the first 24 months or so of his disability.

There may also be a “Proportional Loss Formula” based on the person’s “Indexed Pre-disability Earnings”, which would typically apply a formula offset based on how much the person earns in comparison to his “Indexed Pre-disability Earnings”.

This is my shot in the dark.