Retiring Before Exhausting Your Unpaid Vacation Could Cost You Long Term Disability Benefits

Employees in Chicago who separate from their employer, before or after retirement, are generally aware that they are entitled to their unused accrued vacation time upon departure, but unaware how taking a payout of that time can affect other benefits, such as long term disability or life insurance. Virtually every employer will pay out the value of that vacation time in a lump sum you’re your departure. Most people happily take the money and run. But have you ever considered just using up that vacation time before quitting or retiring? Most do not, but it may be advantageous to do so, in case you ever make a claim for other benefits or have to sue under ERISA § 502(a).

By exhausting your vacation and paid time off before separating from service, you continue active service, albeit on vacation. The distinction between being in active service and on vacation and being separated from employment is a significant one that a recently retired executive of a hospital system learned the hard way. In Sanford v. Life Insurance Company of North America, No. 14-5332 (6th Cir. Feb. 13, 2015), Mr. Sanford was the CEO of Lifepoint. It appears he was required to provide 30 days’ notice of an intent to retire. He gave the notice of his resignation on October 4, 2010, to take effect November 3, 2010. From November 3, 2010 to November 27, 2010, Mr. Sanford was being paid his unused accrued vacation time. Five days after the “effective” date of retirement in his written notice, Mr. Sanford sustained injuries while exiting an aircraft. He claimed short term and long term disability benefits.

The insurer denied coverage because Sanford was not in “Active Service” at the time of the injury. Sanford argued that he was on vacation because he was still being paid out his vacation. But the insurer and the courts viewed him as already retired because of the effective date of retirement in his notice of resignation. The court stated Sanford could not be on vacation from his job responsibilities, because after the effective date of his resignation, he had no job responsibilities.

The best course of action in retiring is to consult an experienced ERISA attorney regarding how the date you propose to retire can affect your other benefits. For instance, the same facts could exist as in Sanford, but where the resigned employee immediately thereafter passes away, and would have otherwise triggered life insurance benefits or accidental death insurance benefits for his beneficiaries. If you are contemplating retirement and have questions about the impact on other benefits, call a knowledgeable ERISA attorney.