Differences Between ERISA and Individual Long-Term Disability Plans

Whether you have an individual long-term disability (LTD) policy or an employer-provided group LTD policy could impact how you pursue your disability claim and your chances of being approved. Most employer-provided group plans are governed by the Employee Retirement Income Security Act, a federal law commonly known as ERISA.

ERISA outlines specific procedures that disability claimants must follow in applying for benefits and filing appeals. Individual LTD policies are simply contracts between LTD carriers and individual policyholders and are governed by state insurance law.

There are many other differences between ERISA and individual policies, including the costs of premiums, portability of coverage, taxation of benefits, and process of appeals. It's important to keep these differences in mind whether you're shopping for a policy or thinking about filing a claim.

Costs of Group vs. Individual LTD Plans

Most long-term disability policies are provided by an employer who also pays the monthly premiums. Those who don't receive coverage through their employers, or who wish to supplement their employer-provided coverage, can purchase individual policies.

Group policies are generally less expensive but provide more basic coverage. Individual policies can be tailored to an individual's specific needs and generally offer a higher quality of coverage.

Benefits of Group vs. Individual LTD Plans

Perhaps the most important provision of any long-term disability policy is how it defines disability. Under many group plans, you're disabled only if you're unable to perform any occupation in the economy. Other group plans define disability as the inability to perform your own occupation, but then the definition shifts to "any occupation" after 24 months. This narrowing of the definition frequently results in people's LTD benefits being terminated after only two years. Individual policies, on the other hand, can be "own occupation," "any occupation," or a hybrid of the two, according to the wishes of the person buying the policy.

Virtually all ERISA and individual plans contain restrictions on disability claims based on mental or nervous disorders or substance abuse, often limiting payments to 12 or 24 months. If you're purchasing an individual policy and wish to be covered for conditions such as depression, anxiety, fibromyalgia, or chronic fatigue syndrome, some carriers may be able to accommodate you in exchange for an increased premium.

How much you'll receive in monthly benefits may also differ between ERISA and individual policies. Group plans usually provide benefits equal to 50% to 75% of your pre-disability income, often with a cap of $5,000 or $10,000 per month. Individual policies may allow you to collect a greater percentage of your salary with a higher monthly maximum.

Portability of LTD Coverage

One of the great features of individual LTD policies is their portability, that is, their ability to travel with you from one job to the next and even to survive periods of unemployment. Group LTD coverage, in contrast, is terminated when your employment relationship with your current employer ends.

The COBRA regulations that might allow your health insurance to continue for a short time after you've been laid off do not apply to LTD insurance. If you try to file for long-term disability benefits after leaving your job, you'll probably find that you're no longer covered. This is important to remember if you're considering filing a disability claim and are having difficulty continuing to work.

Taxation of LTD Benefits

Individual policy premiums for long-term disability are typically paid for with a person's after-tax dollars and the LTD benefits are received tax-free. The converse is usually the case with group plans: employers pay the premiums with before-tax dollars, but the LTD benefits are taxed to the recipient as ordinary income.

The LTD Appeals Process

Administrative appeals. If your ERISA claim has been denied by your LTD insurer or plan administrator, you must exhaust your plan's internal appeals process before filing a lawsuit in federal court. This means you must first ask your insurance company to review its decision (called an administrative appeal) before you can sue. Individual LTD policyholders need not exhaust their administrative appeals before filing a lawsuit and may present new evidence in court during the lawsuit.

State vs. federal court. Individuals may sue in state court for breach of contract, negligence, bad faith, or other causes of action. Unlike ERISA cases, which are decided by a judge, individual LTD policyholders are entitled to a jury trial.

If you have a group LTD policy covered by ERISA, you'll have to sue in federal court. Pay special attention to all filing deadlines for administrative appeals, as missing even a single deadline could be considered a failure to exhaust your internal appeals. This could prevent you from being able to sue the insurance company in federal court.

Also, you should know that ERISA law makes it very difficult to introduce new evidence in federal court, so be sure to submit all relevant evidence regarding your claim to your insurer during the course of your administrative appeal. (Read Nolo's article on stacking the record for an LTD appeal for more information.)

Standard of review. The standard of review applied by courts may also be different depending on whether you have group or individual coverage. Under ERISA, the actions of insurers and plan administrators are often evaluated under a lenient "abuse of discretion" standard -- that means that, unless the insurance company's decision to deny you benefits was wholly unsupported by the evidence, or clearly incorrect, the federal judge cannot overturn the decision.

Insurance carriers are not given the same benefit of the doubt under the state laws that apply to individual policies. Instead, the state judge or jury will look to whether the insurance company fulfilled its promises to you under your LTD contract.

Money damages. Under ERISA the court can award you damages only for the amount of back benefits you should have received, plus interest, while individual policies allow you to recover compensatory damages and punitive damages. Occasionally, the insurance company will be forced to pay your attorneys' fees. Read Nolo's article on long-term disability attorneys' fees for more information.