Articles

EMPLOYERS OFFERING LTD BENEFITS SHOULD UNDERSTAND BENEFIT COVERAGE AND LIMITATIONS

By Denise Y. Tataryn

Many employers offer as part of their benefit package short-term and long-term disability benefits. An employer representative negotiating for a quality disability benefit plan may have a general understanding of the policy options, but likely is not aware of the nuances of the specific language contained in these benefit plans. Disability benefit policies contain many limitations that reduce the value of the coverage for employees. While an employer has no duty to offer disability benefits or any other benefit to employees, an employer should strive to negotiate a policy that provides the best value for the dollar paid.

With the exception of governmental entities and church organizations, most employee benefit arrangements are covered by the Employee Retirement Income Security Act of 1974 (ERISA). This federal law requires certain disclosures and reporting to participants and beneficiaries by the employer, and establishes standards of conduct for plan fiduciaries, which includes all persons who have a role in the selection of the benefit and decision-making authority under the benefit plan.

A primary disclosure obligation of an employer under ERISA is to provide employees with a summary plan description, which provides a summary of the benefit plan to employees. According to the Department of Labor, the summary plan description is the primary vehicle for informing participants and beneficiaries about their rights and benefits under the Employee Benefit Plans. Summary plan descriptions are required to be sufficiently accurate and comprehensive to apprise plan participants and beneficiaries of their rights and obligations. It must be written in a manner calculated to be understood by the average plan participant. The format of the summary plan description may not have the effect of misleading, misinforming, or failing to inform participants and beneficiaries. In addition, the advantages and disadvantages of the plan must be presented without either exaggerating the benefits or minimizing the limitations. Therefore, employers, as sponsors of the benefit plans, must have a good understanding of the benefit that is being offered.

While the employer may delegate its fiduciary duties to the insurance company which is insuring the benefit, the delegation does not insulate the employer from liability under ERISA. A delegating fiduciary must act prudently in selecting the person to whom fiduciary responsibilities are delegated and must monitor that person's performance. ERISA § 405(c)(2). In addition, the person delegating the responsibility remains responsible for assessing whether the party that was delegated the task is properly performing the delegated duties. If a delegating fiduciary becomes aware that a fiduciary has breached its fiduciary responsibilities, the delegating fiduciary will be liable for that breach notwithstanding the proper delegation unless that delegating fiduciary take steps to remedy the breach. An employer is typically considered a fiduciary when communicating to employees about benefit issues. A fiduciary has both a negative duty not to misinform and also an affirmative duty to inform when the fiduciary knows that silence might be harmful. For example, the court in Horn v. Cendant Operations, Inc., 69 Fed. Appx. 421 (10th Cir. 2003), held that the failure of an employer to advise employees of the actively-at-work requirement under a long-term disability policy was a breach of fiduciary duty. In another case, Grimms v. Prudential Fin., Inc., 2006 WL 2990025 (E.D. Ark 2006), the court held that the employer's failure to inform participants about a coverage exception may be a breach of fiduciary duties.

Thus, as a fiduciary of the long-term disability benefit plan, employers should have a good understanding of the material provisions and limitations under the disability plan.

Important provisions in a disability benefit plan that an employer should understand include:

• Disability definition - Most group disability benefit plans initially offer benefits based on an inability to do one's own occupation and then after a period of time, commonly 24 months, an employee is entitled to benefits only if there is an inability to perform any occupation. The longer the Own Occupation period, the better the coverage. The definition of Own Occupation or Regular Occupation can differ. Typically an insurer will write a policy to define Own Occupation as not the job with a specific employer, but as it is performed in a typical work setting for any employer in the general economy. Also, in certain professional organizations, insurers may offer coverage based on a specialty. For example, trial lawyers may have protection based on their specialty as a trial lawyer rather than the general duties of a lawyer.
• Benefit offsets - The term "offsets," when applied in the context of group disability insurance contracts, means the reduction of benefit amounts otherwise allowable under the policy. Group disability policies will always offset for other disability-related income, such as social security disability, worker's compensation, employer sick or vacation pay, or benefits received in a personal injury action. These other disability-related income benefits will reduce the gross disability benefit dollar for dollar. For example, if an employee was injured in a car accident and files a personal injury claim, any damages received may be prorated over a monthly basis and offset from the gross disability benefit. In some cases, that may mean the employee is receiving only a minimal benefit, such as $50 or $100 per month.
• Mental illness limitation - Most group disability policies will limit benefits for a mental illness to 24 months.
• Limitations on certain types of illness - Polices may not provide coverage for certain types of illnesses, such as musculoskeletal disorders.
• Definition of earnings - Benefits will be based on a percentage of past earnings. Earnings may not include commissions, bonuses or other extra compensation. If commissions or bonuses are to be considered, employees should consider the most relevant period of time for the earnings to based upon, such as the average over the last three years, in order to provide benefits based on a realistic stream of income.
• Minimum hours requirement - Most policies require employees to work a minimum number of hours, so part-time employees may not be covered.
• Discretion granted to insurer - Your policy likely provides that the employer has granted discretion making authority to the insurer. This may protect the insurer from liability even where it makes bad decisions. If employers do grant insurers discretion, the courts will give deference to the insurer's decision-making and will require a much higher burden of proof on the employee.
• Premiums - The disability benefit is tax-free to the employee to the extent the employee pays any portion of the premium with post-tax dollars. The employer should consider giving employees the option to pay the premium.