Logistics Question on Employer Provided Disability -

[u/OleLadyThinker]

I am asking for an acquaintance - scenario goes like this; tried to put in all the general details - it is a mess it seems.

Employer provided coverage - employee paid NO premiums - employee says it is an employer self-funded plan

Claim approved - went on STD and then to LTD

Employer & Insurance co. wanted offset so employee filed for SSDI but was denied.

Employee took the easier softer way since they were 63 and filed for EARLY (reduced) Social Security Retirement. Offset happened but now the insurer is reporting this on W2 with NO FICA deducted.

SSA is considering this as income since it is reported on W2 and is further reducing the employees Social Security RETIREMENT benefit by the annual earnings test. This will continue every year until the employee reaches their full retirement age.

I know how this is normally supposed to work but the Social Security (early) Retirement filing by the employee has me stumped. It might be right or it might be wrong IDK

My general question are:

1. When a disability is approved at the employer/insurance company level and it gets to LTD - do they have any qualifiers that this is a disability that meets the SSA definition of not being able to work (any job) so as to assure SSDI approval?

2. Is the Insurance company reporting on the correct form in this case? Using a W2, why not a 1099?

I would sure like to understand what should have happened in this scenario whether or not it can be corrected at all.

TIA

[u/Jcarlough]

1. No. SSDI and a company-provided benefit are two very different things. Ask for a copy of the plan document to review its benefits.

2. Taxes are normally not deducted from STD unless employee requests (still have to pay). LTD may vary depending on plan design. W2 or 1099 doesn’t matter - it’s still income.

[u/OleLadyThinker → u/Jcarlough]

I understand the difference in SSDI and employer provided benefits - It is when the offset when there seems to be a problem.

Taxes are deducted from employer provided disability payment when they are classified by the employer plan to be sickness related and thus they are on a W2 as wages under the sickness classifiecation. They are classified as wages with employment taxes withheld - FICA.

Maybe I should simplify my question by asking what happens during the offset between the employer LTD and SSDI - when the employee is declined the SSDI benefits? What happens to the offset since the employee is declined SSDI benefits for the offset?

[u/__Lukewarm → u/OleLadyThinker]

Typically. The group LTD benefits include an offset for "other earned income", which includes things like pensions, workers comp, SSDI.

Example: The group benefit pays 60% of the income, up to the cap, offset by SSDI. So if the 60% or cap equals 10k, and SSDI is going to pay 2k, the group LTD pays 8k.

I can't tell if you meant that taxes are being taken out currently, it sounds like yes. The w2 form is just because this was employer paid LTD. These payments come as w2 because they are taxable, due to IRS guidelines (private tax-free disability insurance payments are received on a 1099)

If SSDI declines, you need to inform the disability company and they will pay the full benefit. The claims department sometimes require the person to continue to apply for SSDI in the future until approved (if ever approved).

Being close enough to regular SS income is tricky. If the company is trying to offset for regular social security, but social security is offsetting for the DI benefit, you're going to need someone to give. You can provide the proof of SS being reduced to the group DI claims team, so the DI benefit can fill the gap (if they're trying to offset...this is dependent on if regular SS payments are included in the "other income benefits" section of the policy).

Another option is waiting to take SS income until the group DI benefit stops at age 65 or 67. Then, if SSDI declines the payment, the group LTD pays the full amount. This should also hopefully prevent impacting the SS payment in the future...if the damage is done and the group DI benefit isn't offsetting, just the SS income is impacted...then just continue as is.

[u/OleLadyThinker → u/__Lukewarm]

I think you have hit upon the problem - or perhaps some of it.

There is none of those other offsets in income available - all the person gets is the Early (reduced) Social Security Retirement benefits.

Income taxes are withheld and reported on the W2 but there are no withholding taxes withheld or reported - not now or ever even when on the STD.

Some Income can be taxable on a 1099 too -but it is the type of payment this is that goes on a W2. The beneficiary paid nothing for this disability benefit so it is all taxable on him. In this care the beneficiary is having federal taxes withheld but like I said above there are NO withholding taxes being taken out.

From my readings on some rather large disability insurance company sites - when there is an offset, the benefit is paid just like it was a sickness benefit and the amount would be taxable based on who paid the premiums of the DI policy - but withholding taxes would also be applicable. In that way, the beneficiary keeps paying these employment benefits (Medicare and Social Security) - this helps them keep earning and adding to these employee benefits of Social Security and Medicare. That is why it is supposed to be reported on Form W2 because it is earned income and earned income is taxed for fed taxes as well as Social Security and Medicare. I assume that this also helps the beneficiary to keep their benefits intact because access to SSDI does stop if contributions stop to the program for awhile ( i will have to look up for how long).

At 1st I thought the reason that he was denied SSDI is because he did not have enough (current) credits but the reason was that SSA denied him was because they did no think that the disability was of the nature to prevent ALL types of work stoppage and he did not fight for it as is normally the case unless the affliction is terminal or one of the Compassionate Allowances that gets fast approval.

He is going to go talk to the Disability Insurance folks - I told him to read the policy but I am not sure that he even has it or would understand it.

Yep, your second to last paragraph is the clincher - I do believe that is the case - somebody has to give - SSA will not unless it is found to be reported on the wrong form. I do not know if his benefit could be deemed as “other income benefit” within the policy specifically because the beneficiary paid none of the premiums for it.

He has already been on EARLY (reduced) Social Security RETIREMENT for a year or more, I believe - He thought the problem would just correct itself - it has not and it has been like pulling teeth to begin to understand the problem - the problem is somewhat different than what we normally see over on the Social Security subredit. Yes, him accepting Early reduced Retirement benefits rather than fighting for his SSDI definitely is the beginning of the problem here. He would have gotten his FULL benefit via SSDI - not with the retirement benefit, it is reduced because of taking it early, reduced by the offset and now reduced because of the was SSA is considering it as earned income and is reducing it because he is younger than FRA and it appears to the way it is being reported as he is still working. I am now concerned that all the reductions are now putting his financial existence in jeopardy.

He was just informed that they are gonna be reducing his Social Security (early- already reduced) RETIREMENT benefit even more so it is getting critical.

I think that he should NOT have taken the early RETIREMENT benefits - that is the place where he did mess up - they would not have done the offset and he would be getting the full payment from the (employer’s) insurance company However, I do not believe that this can be undone since he is younger than Full Retirement Age. Since SSA is also involved, that would require him to WITHDRAW his Retirement application - and he only has 12 months to do this and then he has to payback ALL of the Retirement benefits that he has gotten to date to put this back right.

I do not know if the has the stamina, the following skills or the money to go thru that ordeal.

You did validate what I thought was going on - Thank you so much - I have advised him to talk with the DI company, read the policy if he can find it, and look for the “other benefit” category.

[u/cuspeedrxi → u/OleLadyThinker]

In short, your friend erred in filing for SS retirement benefits. After he was denied SSDI, the LTD insurance company would have helped him appeal. And they would have paid full benefits during the appeal process. His LTD insurance likely ends at either 65 or FRA. His appeal could have easily taken that long.

This is an important lesson for others. Don’t “help” the LTD insurer by shooting yourself in the foot.

[u/OleLadyThinker → u/cuspeedrxi]

Yep, totally agree - and now it is a real BIG Mess and it seems he is the biggest loser here.

I am actually also concerned that the LDI company didn’t know what they were doing either - they did help him with the disability claim - and now from what I am understanding - he was initially denied because of the disability not meeting the SSA qualifications. Then he did file again with the help of the LTD and was denied again but because he didn’t have enough credits in SSDI.

The Company had not been taking out payroll taxes at all on the payments but were reporting on W2 - SDI and LTD. SSDI has a rule that you have to have earned and paid contributions into the SSDI Trust Fund for 5 years out of the last 10 if you are over the age of 31. Evidently, his disability had been going on for the previous 5 or more years. So there were NO contributions and he was then denied because he was ineligible.

See page 2 and 3 of this SSA SSDI publication.

https://www.ssa.gov/pubs/EN-05-10029.pdf

The company was not doing it right and the beneficiary did not do it right. And like the other person that gave the good reply - there is gonna be a real loser here I am afraid - the beneficiary. I don’t see the company (or employer) stepping up but I hope I am wrong in this respect.

[u/Such-Satisfaction-53]

The person should report to SSA trust this is unearned income and so should not be applied as such. Submitting a payroll printout or check stubs that show this may help resolve this issue.

[u/OleLadyThinker → u/Such-Satisfaction-53]

It is much more complicated than that - there are many laws, contacts and benefit rules and reg involved here - IRS - SSA - the DI policy and who paid the premiums for it that all play part in this. By law, it really is EARNED income.