Many times individuals receiving long-term disability insurance benefits from a group or individual plan will be required to file for Social Security disability benefits as well. This is because most long-term disability policies allow the insurance company to reduce payments dollar-for-dollar by the amount received from Social Security.
For example, an individual receiving $2,000 in long-term-disability benefits per month that is approved for $1,000 in Social Security disability will still receive a total of $2,000 per month: $1,000 from the insurance carrier and $1,000 from Social Security. The amount the long-term-disability payment is reduced is called an offset.
According to Nolo, most individuals can expect to wait at least a year before a disability claim is approved. However, the Social Security Administration back-pays individuals to the initial date of application. In some cases, the Social Security Administration can pay for up to 12 months prior to the application date if the disability occurred at least 17 months before that date. This is paid in the form of a lump sum.
However, most long-term-disability policies have an offset provision, meaning that they may be entitled to all or most of the back pay. The insurance company uses the Notice of Award received from Social Security to calculate the overpayment.
How Back Pay is Collected
An overpayment is dealt with in one of three ways. Most companies require immediate reimbursement of the full overpayment amount as soon as the back pay is received. Other companies will agree to reduce the monthly long-term-disability payment until the debt is paid back. Lastly, if the amount is not paid back, insurance companies could opt to stop paying long-term-disability payments entirely until the overpayment has been repaid.
Most insurance companies require individuals to sign a Social Security Reimbursement Agreement, stating that they will repay any retroactive Social Security benefits to the company. Occasionally, a Payment Option Form is sent offering the choice to receive a reduced amount of long-term-disability payments while the Social Security case is pending, which could avoid an overpayment to pay back with Social Security back pay.
Dependent Benefits and Attorney’s Fees
If Social Security is paying dependent benefits to a spouse or children based on a disability, many long-term-disability policies allow the insurance carrier to offset these amounts from your long-term-disability payments as well. However, Social Security’s yearly cost-of-living adjustment (COLA) is rarely factored into the offset.
Attorney’s fees (typically 25% of the Social Security back pay) are generally not included when figuring the offset, allowing many Social Security disability claimants to obtain essentially free legal representation. This is because the 25% fee is taken out of back pay before the insurance company calculates the overpayment.
Although insurance companies may offer to provide an attorney or representative to handle the disability case, it could be worth looking into hiring an experienced, independent disability attorney, especially if the amount of back pay would allow payment of lawyers’ fees essentially free of charge.