Disability insurance plans are welfare benefit plans
subject to the requirements of the Employee Retirement Income
Security Act (ERISA). Plans must be in writing and must
meet the reporting and disclosure requirements of ERISA. A disability
insurance plan must include a claims procedure that is explained in
the plan's summary plan description.
Enhanced claims procedure requirements.
Stricter claims procedure requirements apply to disability plans
than apply to many other ERISA plans (except for even stricter rules
for health insurance plans). Disability claims must generally be decided
within 45 days with the possibility of two 30-day extensions for circumstances
beyond the plan's control. Any adverse benefit determination must
include the specific reason or reasons for the denial.
Please see the
Benefits Recordkeeping and Disclosures
Practice tip: Plans should provide
that the plan administrator has discretion to interpret the plan and
determine benefit eligibility. Such a provision protects a plan in
the event of a lawsuit for benefits, because courts will generally
reverse the administrator's decision only if they believe it was arbitrary
or capricious. If such discretion is not specifically granted, a court
will review the claim from scratch and substitute its own judgment
for that of the plan administrator. Even with such a provision, it
is important to follow the plan's claim procedures exactly. If the
claims procedure requirements are not completely followed in a particular
case, a court may not defer to the plan administrator's determination.
The federal Age Discrimination in Employment
Act makes it illegal for employers to deny long-term benefits
altogether on the basis of age. For example, it is illegal to deny
all long-term disability benefits to employees over the age of 65.
However, according to the Equal Employment Opportunity Commission
(EEOC), it is legal to reduce either the level or the duration of benefits for older workers so that the cost of benefits
provided older workers is equal to the cost of those provided to younger
workers. The EEOC has specifically ruled that it is permissible to
reduce the duration of benefits in either of the following ways:
• If the disability occurs at the age of 60 or less, it
is legal to cut off benefits at the age of 65; or
• If the disability occurs after the age of 60, benefits
may be cut off after five years(29 CFR 1625.10(f)(ii)).
If employees pay disability insurance premiums themselves,
with after-tax dollars, any benefits received will be tax-free. If
the employer pays the premiums, the benefit payments are taxable to
the employee. This means that when the employee pays the premium,
less income has to be replaced for the employee to maintain the same
standard of living while disabled.
The FMLA requires that employers with 50 or more employees
give unpaid leave of up to 12 weeks per year to employees with “serious
Please see the
national Leave of Absence
What constitutes a disability under a
short-term disability plan and what constitutes a serious health condition
under the FMLA may overlap. FMLA programs and disability programs
should be coordinated, and employers should inform employees requesting
leave for a serious health condition that (1) FMLA leave (if applicable)
is unpaid, and (2) to the extent a serious health condition is also
a disability under the short-term disability policy, an employee may
be entitled to income replacement under the short-term disability
By referring to the disability policy, an employer puts
an employee on notice that FMLA leave taken for a serious health condition
may also trigger disability benefits.
Substitution of paid leave. Final
FMLA regulations indicate that leave taken pursuant to a disability
benefit plan would be considered FMLA leave for a serious health condition
and counted in the leave entitlement permitted under the FMLA, if
the situation otherwise meets the criteria for FMLA leave. In such
a case, the employer may designate the leave as FMLA leave and count
the leave against the employee’s FMLA leave entitlement.
In addition, the FMLA regulations permit an eligible
employee to choose to substitute accrued paid leave (such as sick,
personal, or vacation leave) for FMLA leave. If an employee does not
choose to substitute accrued paid leave, the employer may require
the employee to substitute accrued paid leave for unpaid FMLA leave.
This means the paid leave provided by the employer would run concurrently
with the unpaid FMLA leave. But because leave pursuant to a disability
benefit plan is not unpaid, the regulation provides that neither the
employee nor the employer may require the substitution of paid leave.
Employers and employees, however, may agree, unless prohibited by
state law, to have paid leave supplement the disability plan benefits,
such as in the case in which a plan provides replacement income for only two-thirds of an employee’s
salary (29 CFR
Disability plans generally require a statement verifying
an illness or injury before approving disability income coverage.
Authorization is required for a healthcare provider to provide such
information directly to a disability plan. Refusal to authorize the
release of information needed to process a disability claim could
be grounds for denying the claim. Employers may want to amend their
disability policies to require that employees complete an authorization
in order to be eligible for benefits.
Health insurance plans are covered by the Health
Insurance Portability and Accountability Act (HIPAA). Thus,
information that a health plan has may not be used to resolve a disability
plan claim. This may be difficult to do when the person responsible
for administering both plans is the same individual. In such an event,
the plan administer should make sure that the disability plan obtains
medical information independently from the health plan.