Relying on Social Security Administration decision about disability

[Peter Gulia]

Quickly following the recent publication of the Labor department's rule on an ERISA-governed plan's claims procedure concerning a disability benefit, some practitioners suggest that an employer design an individual-account (defined-contribution) retirement plan, if any benefit is provided because a participant is disabled, to refer to the Social Security Administration's decision on whether a person is disabled.

Leaving aside questions about an alien who is authorized to work in the United States, is there any circumstance that would make a citizen ineligible for a Social Security benefit so there could be no SSA decision to refer to?

[david rigby]

I think so. Be sure to investigate the "duration of work" test, which could mean a disabled person is not eligible for SS disability benefits.

Summary booklet here: https://www.ssa.gov/pubs/EN-05-10029.pdf

[rocknrolls2]

Alternatively, the Plan could define eligibility for a disability retirement benefit by reference to eligibility to long-term disability coverage under the employer's long-term disability plan.

[Peter Gulia]

David Rigby, thank you for the excellent help.

rocknrolls2, yes that might be a useful efficiency. But many employers don't have a disability plan.

Another query for the BenefitsLink mavens: Is it feasible to design an individual-account retirement plan so there is no benefit that turns on whether a participant is disabled?

[david rigby]

Another query for the BenefitsLink mavens: Is it feasible to design an individual-account retirement plan so there is no benefit that turns on whether a participant is disabled?

Sort of. I've seen many qualified plans that have no special provision for disability (no 411d6 protection). Sometimes, vesting is triggered upon disability (in which case a definition is needed). But, it's not required.

[Lou S.]

To add if there is no provision for disability in the DC plan, the real impact on the participant is if the code on the 1099-R is on account of disability which is not subject to the early distribution penalty versus a regular distribution code that would likely be subject to the 10% penalty on early distribution, assuming the participant is on the younger side.

[ESOP Guy]

There are plenty of DC plans that define disability something to the effect of:

The person is permanently unable to perform their job performance. To determine that all it takes is a doctor's declaration that is true. There typically is something in the language about the doctor has to be acceptable to the Sponsor.

Here is a quote from one of my client's documents

Disability is a physical or mental condition you suffer while you are a Participant that, in the opinion of a

doctor approved by the Administrator, totally and permanently prevents yon from performing your

specified duties. You will not be considered disabled if the disability is caused by (I) chronic or excessive

use ofintoxicunts or other substances, (2) an intentionally self-inflicted injury or illness and (3) an unlawful

act you commit.

(Not sure why my copy did such an odd margin thing.)

One of the problems with using Social Security determination is they can be VERY slow.

Just had this happen recently. Plan X has an employee terminate in the spring of 2014. Everyone agree it was for health reasons. He applied for SSA disability benefits. The SSA ruled in 2016 he was disabled as of the date he terminated back in 2014. It was everyone's opinion that means he terminated due to disability in 2014. Since we didn't know that back in 2014 and the plan has last day language we had to go back and compute his missed contribution. Being an ESOP we had to figure out how many shares he should have gotten. How much dividends he missed between 2014 and now.......

This is NOT the first time we have had to do a correction due to a retroactive determination someone was disablity termination and not a regular termination. I have seen forfeiture restores be needed because of this along with lost contribution and earnings.

[Peter Gulia]

Thanks, David Rigby, Lou S., and ESOP Guy for the further information.

Lou S., a BenefitsLink thread earlier this year explained that some administrators do not code a 1099-R concerning disability if the administrator's decision that the distributee was entitled to the distribution did not require the administrator to decide whether the participant was disabled (usually because a distribution was entitled on any severance-from-employment).

This leaves processing about whether an early-distribution tax applies or doesn't between the taxpayer and the Internal Revenue Service. What experiences have BenefitsLink readers observed about this?

[hr for me]

Agree with the issue of SS timing..it's not generally a quick process. I could see where it could be 1 factor of proof in a multitude of evidence, but shouldn't be the only thing relied upon. Unless like ESOP Guy said you want to have to go back and revise 1099Rs and possibly other benefits later.