Billions of Dollars Hiding in Plain Sight: Federal Government Allows Private Insurers to Offset Their Financial Obligations With Social Security Disability Payments – Why?

ERISA attorney explains how non-partisan policy change would save money and benefit disabled American workers

Media Contact: Barbara M. Fornasiero, EAFocus Communications; barbara@eafocus.com; 248.260.8466

Royal Oak, Mich.—February 27,2025— As the search for savings in federal dollars zooms forward, employee benefits and ERISA attorney and litigator John Joseph (J.J.) Conway of J.J. Conway Law, notes that a longstanding offset allowed by the government continues to reward private insurers with billions of dollars for not paying full benefits to employees who become permanently disabled while covered under a private long-term-disability insurance plan.

“We are overdue for the enactment of legislation that restricts how Social Security Disability Benefits may be used by private insurers to offset their own financial obligations,” Conway said. “A non-partisan, non-divisive public policy change would save the country billions while benefitting the average American worker who becomes permanently disabled while covered by an employer-provided long-term disability policy.”

First, some history: The Social Security Act is a Depression-era law whose original purpose was to protect widows and children when the family’s provider died. Over time, Social Security’s scope of coverage expanded, becoming primarily a retirement plan while continuing to provide death benefits to minor children. With the creation of the Disability Insurance Benefits program (SSDI), the Act expanded to protect workers who became permanently disabled. In most cases, Social Security’s legal standard of disability is much stricter than what a private disability contract requires. A private disability contract may pay a benefit if an employee cannot do their own job. Social Security requires proof of an inability to perform any job in the national economy.

Since its inception, SSDI coverage has been exploited by the disability insurance industry. Here’s how: a typical employee with disability insurance is covered through their employer’s group long-term disability plan, often an ERISA-qualified plan. If this employee becomes seriously ill or is hurt, they can file a claim with the employer’s disability insurer. When a claim is filed, the insurer sends the employee a packet of forms which includes a contract requiring them to file a claim with Social Security and simultaneously claim disability benefits from the federal government.

“The insurer will actually condition the payment of benefits on the claimant’s filing an application with Social Security and pursuing all avenues of appeal. Some insurers will even provide the disabled employee with legal representation to pursue the Social Security claim,” Conway said. “Because the private disability insurer receives a dollar for dollar offset (or credit) for any monies paid by Social Security, the push by the insurer to require the filing of an SSDI claim happens immediately, even though the employee is not yet eligible. It’s really quite brazen.”

Example: how private disability insurers use SSDI to transfer part of their financial liability to taxpayers

• A 40-year-old female with two minor children earns $75,000 per year. If the employer’s private disability contract pays her a benefit equal to 60% of her salary, she would be entitled to a monthly payment of $3,750 per month or $45,000 per year.

• If she were required to apply for SSDI, and her monthly Social Security benefit was $1,600 and $750 for each of her two children, the government would be paying her $3100. If she is awarded that amount from Social Security– voila – the insurance company’s responsibility drops to $650 per month.

• During the period of “own occupation” benefits, typically two years, the insurer’s $90,000 obligation drops to $15,600, and the U.S. taxpayer becomes responsible for paying the claimant $74,400, even though the employee had private insurance.

“Considering the original purpose of the Social Security Act, and even with its subsequent amendments, it is nonsensical to have taxpayers on the hook to pay for a benefit when a person is contractually eligible for covered private insurance and may not even qualify for SSDI,” Conway said.

Exceptions

There are, of course, exceptions. In the case of a seriously injured or ill person or the victim of, for example, a stroke, an early claim seeking Social Security benefits is entirely appropriate. Social Security claimants also receive Medicare benefits, so there are other considerations; but in those cases where an individual’s illness or injury has not yet risen to the level of a permanent disability, this practice seems to benefit no one but the insurance industry.

What can be done?

Conway says state insurance commissioners have been ineffective at combatting this practice, so the Social Security Act or the ERISA statute could be amended and updated. He suggests three reform propositions that could be added:

• A disability insurer could not require a disabled employee to file a claim for Social Security Disability benefits any earlier than the first 36 months of continuous disability unless the employee wishes to do so voluntarily.
• A disability insurance company would not be permitted to take an offset for Social Security for any period where the insurer denied a claim for disability benefits; and
• If a private disability claim in “approved” status is later terminated and then reinstated, no Social Security offset could be claimed for any period where the private contract benefits were not paid.

“These are common sense reforms that would bring about meaningful change in the lives of the occupationally disabled worker while saving the federal government billions in actual benefit and administrative costs,” Conway said. “As a bonus, they would also clean up questionable claims-handling practices within the disability insurance industry.”

About J.J. Conway Law

J.J. Conway Law, an employee benefits litigation and ERISA firm founded by John Joseph (J.J.) Conway in 1999, represents those seeking full access to the employee benefits they earned and are legally entitled to. The firm has been involved with nationally significant employee benefit, disability and pension cases, including class action lawsuits for such landmark decisions as requiring Michigan private insurers to cover autism health treatments for children through age 18 and protecting the pension rights of City of Detroit employees, police and firefighters as well as Wayne County employees by holding their trustees accountable for investment decisions. The firm’s motto, Conquer Tomorrow^®, is dedicated to making the future easier for their clients across the United States. Learn more on the firm’s website.