The Effect Of A Severance Or Employment Agreement On A Disability Or ERISA Benefit Claim

In cases where an employee has a serious illness or injury that will likely prevent them from returning to work for many months or longer, their employer may ask them to sign an employment/settlement agreement and/or severance agreement in exchange for additional compensation or pursuant to company policy. Incorporated into these agreements is usually a general release, which forces the employee to waive their right to any and all potential claims. These agreements, particularly the language contained in the general release, often create a dilemma for the employee: execute the agreement and relinquish potential valuable claims or surrender a valuable severance or settlement with the employer. Accordingly, it is in the employee’s best interest to carefully scrutinize the agreement and the general release and seek the assistance of an attorney. In fact, most agreements include language advising and encouraging the employee to seek legal counsel; such language is for the benefit of the employer as well as the employee. In instances where the agreement/release requires the employee to seek legal advice, employers may agree to cover the cost of the employee’s legal fees or at least provide a lump sum amount to be used towards legal fees.

Many employees are willing to sign a general release at the time the agreement is presented because they are unaware of any existing or potential claims that appear more valuable than the cash payment or settlement amount being offered. However, they do not realize that there may be a number of potential claims, including those related to long term and short term disability benefits and health insurance continuation. Many severance agreements and general releases reference ERISA claims and release plan administrators and insurance providers from all liability. Accordingly, by signing the agreement, the employee may have unknowingly waived his right to disability benefits and/or the opportunity to appeal a denial or termination of such benefits. Another consideration is that severance pay or an employment settlement may be interpreted by a disability insurance carrier as “Other Income Benefits” and thus considered “deductible Income.” The effect of such a determination is that the insured’s disability benefit is reduced by the amount of the payment or settlement. Many group policies provide that specific types of income or benefits received by the insured are “deductible income” and thus offset from the disability benefit payable to the insured. Examples of “Other Income Benefits” include Work Earnings, benefits received under the Federal Social Security Act, benefits payable under a state disability income benefit law, benefits received under other group insurance coverage, and disability or retirement benefits received under an employer’s retirement pain. Accordingly, the insurance company may attempt to classify settlement money or severance pay as an “Other Income Benefit”. It should be further noted that most ERISA and long term disability policies allow the insurer to seek reimbursement where there has been an overpayment of the claim. Specifically, the policy will provide that where an insured received deductible income, the insurance company can demand immediate repayment or withhold benefits until they have been repaid in full.

Carefully reviewing the wording of a severance or employment agreement as well as the general release terms incorporated into said agreement and consulting an attorney before signing the agreement may protect an employee’s right to obtain future disability and/or health insurance benefits; appeal or legally pursue benefits where such benefits have been denied or terminated; and prevent a benefit from being offset by deductible income or the insurance company from seeking a reimbursement of an alleged overpayment. At Disability Insurance Law Group, we have successfully worked with employers and their legal counsel to draft releases and agreements to specifically address ERISA plans, itemize the types of benefits to be included or excluded from the release, carve out specific language plainly stating what benefits are being relinquished by the employee and which are being maintained, and to include language, where reasonable, to clearly convey that the settlement or severance is not a work earning or a deductible benefit.

The attorneys at Disability Insurance Law Group have extensive experience representing disability income claimants and are happy to discuss these questions and any other important issues during our free consultation. We represent clients throughout the nation and have attorneys that are able to practice in numerous states. Contact us today at www.dilawgroup.com or (954)-989-9000 for the answers and experienced legal help you need.