We have written on this subject before and the issue is one we get many questions on. Whether a disability insurance claimant must repay the insurance company for a retroactive social security award depends on the policy at issue and any subsequent agreements between the claimant and insurance company. Unfortunately, most ERISA governed long-term disability policies contain language giving the insurance company the right to recover any award of back benefits made by the Social Security Administration. Insurance companies often take it a step further by requiring claimants to sign “reimbursement agreements” by which the claimant promises to pay back any award of SSDI benefits that would result in an overpayment by the insurance company.
In a recent case out of California, a federal court ruled that the Aetna could not collect an SSDI overpayment.
History of Ms. Wong’s LTD Claim
Ms. Wong was a Regional Facility Manager at the Hobart West Group when she began suffering from back, leg, and groin pain as a result of complications from her pregnancy. In March 2006, Aetna granted Ms. Wong benefits under her employer sponsored LTD Plan.
Throughout Ms. Wong’s claim Aetna denied and subsequently reinstated Ms. Wong’s benefits on two separate occasions. In December 2010, Aetna denied Ms. Wong’s claim for the third time prompting Ms. Wong to submit an appeal, which she submitted on May 24, 2011 and which Aetna subsequently denied on September 22, 2011.
While on claim with Aetna, Ms. Wong had been advised by Aetna to apply for Social Security disability benefits. On October 21, 2011, the SSA approved Ms. Wong’s claim and granted her an award dating back to April 1, 2010. Naturally, within a month of Ms. Wong’s receipt of her award, Aetna sent a letter to Ms. Wong asserting that “it was entitled to reimbursement for the retroactive benefits granted by the SSA in the amount of $12,402”.
Ms. Wong instituted an action in federal court in December 2012 seeking benefits owed to her. Aetna responded with a counterclaim seeking Ms. Wong’s retroactively awarded social security benefits.
In reviewing the claim, the court concluded that Aetna had abused its discretion in denying Ms. Wong’s claim. In evaluating Aetna’s counterclaim, the court explained that there are “at least three criteria” that must be satisfied for Aetna to secure its claim to the overpayment.
- First, there must be a promise by the beneficiary to reimburse the fiduciary for benefits paid under the plan in the event of a recovery from a third party.
- Second, the reimbursement agreement must “specifically identify a particular fund, distinct from the beneficiary’s general assets, from which the fiduciary will be reimbursed”.
- Third, the funds specifically identified by the fiduciary must be within the possession and control of the beneficiary.
As is often the case, the first criterion was clearly satisfied, as the LTD policy or a signed reimbursement agreement would be sufficient. Ms. Wong did not dispute that she contracted to reimburse Aetna for overpayment of LTD benefits stemming from her receiving benefits from other sources, including the SSA.
However, the second element failed. As the court explained, the Social Security Act prohibits attachment of Social Security disability benefits. Although Aetna attempted to identify the particular fund as the plan benefits overpaid to Wong the court quoted the Social Security Act, which provides:
“[N]one of the moneys paid or payable or rights existing under this [Social Security] subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process.”
As such, and because Ms. Wong’s benefits had already been paid out, Aetna could not identify the benefits themselves as a particular fund, and the Plan did not identify a fund distinct from Ms. Wong’s general assets that would permit the attachment of her Social Security disability payments.
Furthermore, Ms. Wong argued, and Aetna did not dispute, that Ms. Wong had already spent the overpaid benefits.
The court’s decision should not be taken to mean that a claimant does not have to repay the insurance company for overpayments resulting from money received from the SSA or other deductible sources of income. Other courts have ruled differently and whether a claimant must repay the insurance company requires an analysis of all the surrounding circumstances including the policy at issue and any signed reimbursement agreement.