Disability Benefit Offset and the Definition of Earnings
A long-term disability plan pays 60% of predisability monthly earnings, reduced by "other income benefits," including Social Security disability benefits and workers' compensation. "Earnings" is defined as base salary plus regularly scheduled commissions and bonuses, but excludes overtime and expense reimbursements. Marcus, a regional sales manager, earned a $7,500 monthly base salary, $1,200 per month in commissions averaged over the prior 12 months, and $600 per month in overtime during the busy fourth quarter. He is injured off the job on October 3 and is approved for LTD after a 90-day elimination period. He later receives a $1,900 monthly Social Security disability award, retroactive to his date of disability. The plan has a 60% minimum benefit provision guaranteeing at least $100 per month.
1. Calculate Marcus's gross monthly benefit and his net benefit after offsets, showing each step.
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Step 1: Determine monthly earnings. Base salary $7,500 plus regularly scheduled commissions $1,200 equals $8,700. Overtime is expressly excluded from the definition, so the $600 is not counted. Step 2: Gross LTD benefit is 60% of $8,700 = $5,220. Step 3: Apply the offset for other income benefits. The Social Security award of $1,900 per month is an offset. Net benefit = $5,220 − $1,900 = $3,320. Step 4: Test the minimum benefit provision. The $3,320 result exceeds the $100 minimum, so the minimum does not change the outcome. Note the retroactive nature of the Social Security award: the plan likely permits recovery of overpayments for the months the SSDI award covered retroactively, so the carrier should calculate the retroactive offset separately and may seek reimbursement or offset future benefits. Also confirm whether the SSDI award includes dependent benefits, which many plans also offset; if so, the net would be lower.
2. Marcus argues his overtime should count because it was 'regular for him.' How should the claim analyst respond, and what plan-design issue does this expose?
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The analyst should apply the plan's written definition. The definition of earnings expressly excludes overtime, regardless of how frequently a particular employee works it. "Regularly scheduled commissions and bonuses" is a defined category; overtime is listed as an exclusion, so the analyst cannot import a subjective 'regular for him' test. The response should cite the definition and offer the appeals process. The episode exposes a plan-design tension: excluding overtime can produce a benefit that feels unfair to employees whose pay is overtime-heavy, and it may create disputes at claim time. A plan sponsor could instead define earnings to include overtime averaged over a stated period, which improves perceived fairness but raises cost and administrative complexity. The analyst should flag the recurring dispute to the plan sponsor without changing the determination.