Think Twice Before Taking a Lump Sum Distribution While on Long-Term Disability

Employees in Chicago on claim for long-term disability often have the option to commence pension payments from their employer, or to take a lump sum distribution. But if you are on long-term disability, the form of payment you take can have largely different effects on your long-term disability payments. Long-term disability insurance policies frequently offset “other income,” which usually includes any disability or retirement pension payments from an employer sponsored plan. The policies frequently delineate how to offset in the case of a lump sum distribution, but different policies can vary in how they treat such distributions. A recent case shows how devastating such a distribution can be.

In Walker v. Reliance Standard Life Insurance Co., No. 2:22-cv-109, 2023 WL 3066708 (E.D. Tenn. Apr. 24, 2023), Walker was on long-term disability with Reliance Standard, and his disability was uncontested. Walker took a lump sum distribution from his pension plan. His insurance policy provided Reliance Standard would reduce its benefit payments to Walker by any pension benefits he received. It further provided that in the case of a lump sum distribution, if the payment failed to state a time period to which it relates, the lump sum would be offset over 60 months. Reliance Standard then applied the offset over a 60-month period, with which Walker disagreed. After unsuccessfully appealing the decision, Walker sued under ERISA § 502(a).

The United States District Court for the Eastern District of Tennessee agreed with Reliance Standard and applied the offset over 60 months. Walker argued because the pension lump sum was a conversion from a lifetime annuity, it should be spread over his remaining life expectancy. The Court held the long-term disability policy unambiguously stated that in the absence of the payment specifying the time period to which it relates, the 60-month time period would apply. Walker’s lump sum distribution did not state it was payable over his life expectancy. Walker thus would have been better off taking the monthly payments from the pension, instead of taking the lump sum distribution.

If you have a long-term disability claim and are considering a lump sum distribution, or other settlement of a personal injury or workers’ compensation claim, contact a skilled ERISA long-term disability lawyer today.