Sadly, it’s not uncommon for people to wait a year or more after filing for Social Security disability (SSD) benefits before they’re approved. While a person is waiting for those benefits to come in, they may already be collecting long-term disability (LTD) insurance payments. Due to the complicated nature of how LTD insurance and SSD interact, some people may be surprised to discover that when their SSD benefits finally begin, their insurance company takes any SSD back pay the person should have received.
If someone is counting on back pay from SSD benefits but has them taken away unexpectedly, the results can be devastating. People who collect LTD and apply for SSD benefits need to inform themselves of how they can expect the two payments to interact. After reading the information below, feel free to contact the Social Security lawyers at GTB&S for a free consultation.
How Social Security and Long-Term Disability Interact
When people begin collecting LTD insurance payments, their insurance company will most likely require them to file for SSD benefits and provide proof that they filed within a certain amount of time or risk having benefits suspended. This is because if a person is approved for SSD benefits, the amount they receive pays off a portion of what the insurance company would be required to pay.
For example, say a person is entitled to $1,500 of LTD benefits per month. If that person is then approved for $1,000 from SSD each month, he or she will still only receive a total of $1,500. The insurance company will pay $500 and Social Security will pay $1,000. This reduction of payment amounts is called an “offset.”
However, the interaction between these two payment types becomes more complicated when dealing with SSD back pay. Most people who qualify for SSD benefits receive back pay due from the time when they first filed to when they were approved. Social Security gives them back pay to the amount of what their monthly payments would have totaled for the time passed between the filing and approval. Thus, if a person is eligible to receive $1,000 per month from SSD and it takes 12 months after filing to be approved, back pay can total $12,000.
If a person is collecting on LTD insurance and receives a large lump sum of back pay from SSD, the insurance carrier may be entitled to a large percentage of it. This is due to the LTD offset mentioned earlier.
A person receives back pay for the months he or she should have been receiving SSD but did not. The insurance carrier wants to be paid for all the months SSD should have been offsetting their payments. Therefore, most LTD carriers write into their contracts that they have the right to claim SSD back pay to recoup their money for all the months they had to pay the full monthly amount entitled to the person. Carriers call these months “overpayment.”
Handling LTD Overpayment
Insurance companies usually handle overpayments in one of two ways:
- Most often, carriers demand that the full overpayment amount be paid to them as soon as SSD back pay is received.
- Sometimes an insurance company agrees to reduce the monthly amounts it has to pay out until the overpayment has been paid off.
If a person is required to pay an overpayment but refuses to, the insurance carrier will likely stop issuing monthly payments altogether until the overpayment is repaid. This is a last-resort option that does not happen often.
Complications to Overpayments
Several factors affect the exact amount of payment offset (and thus overpayment) an insurance carrier can claim. Carriers can use dependent benefits paid by SSD to a spouse or children to offset monthly payments. Other forms of income, such as state short-term disability benefits, workers’ compensation, and third-party settlements, can also be claimed by insurance companies to offset payments.
Insurance carriers usually do not factor Social Security’s annual cost-of-living adjustments into their payment offsets. Attorney’s fees are also not usually included in insurance offsets. These usually equal 25% of SSD back pay.
One area of SSD back pay and LTD overpayment that can be troublesome is in dealing with taxes. LTD payments are nontaxable when provided as a company benefit. People with individual LTD plans should consult their insurance terms. SSD benefits can be taxed if the person receiving them also receives other income.
The exact percentage of SSD back pay that can be taxed depends on how much provisional income the person makes and whether he or she files taxes jointly or as an individual. People with questions about whether their benefits will be taxed should consult their tax preparer.
What this means for someone receiving back pay and having an insurance carrier claim it to repay overpayment is that the person might end up paying taxes on money he or she doesn’t have. Thankfully, the IRS allows people receiving disability to apportion back pay onto the previous year’s tax returns. This usually reduces or eliminates the taxable portion of the back pay lump sum.
Will your LTD insurance carrier be entitled to your SSD back pay?
Whether or not insurance carriers can take the back pay depends on their contracts, not SSD laws or anything else. Therefore, it’s possible for an insurance carrier to NOT put a provision into contracts regarding SSD back pay, but almost all of them do. The only way to know for certain if an insurance carrier can claim SSD back pay is to read the agreement. Dealing with the complications of SSD and LTD interactions can be incredibly difficult, especially when it comes to back payments. Different types and amounts of income, various benefits, and tax issues can all come into play.
No layperson should expect to navigate these complexities alone. Remember that attorney fees are taken out of disability back pay before overpayment is factored, so people receiving disability can essentially get free legal representation to assist them with these problems. This is an important measure to take, as overlooking your entitlements can result in thousands of dollars lost.