I. The Basics
One of the substantial benefits of a public employee retirement plan is income protection in case of disability. This outline will explore the various elements of disability retirement and the pitfalls associated with management of disability cases. Listed below are the primary factors with which plans should be concerned, each of which will be discussed and illustrated in greater detail. Those elements are:
- Nature of the Benefit – service vs. non-service disability.
- Causation.
- Permanency.
- Totality.
- The application process.
- Managing medical information.
- Due process.
- Re-examination.
- Detecting fraud.
- Benefit offsets.
- Tax treatment of benefits.
II. The Nature of the Benefit.
Most retirement plans distinguish disability benefits between those caused by service in the line of duty and those incurred from other causes. Often, benefit levels differ with minimum guaranteed payments for service-connected disabilities. Non-service disabilities often are simply a form of early retirement without an actuarial penalty, providing vested employees with low cost disability insurance.
In terms of plan design, having a single standard of disability eliminates any concern with causation. A disability inquiry will simply be limited to whether or not the disability is permanent and total. In those plans that distinguish on the basis of causation, a substantial number of inquiries need to be made to determine the true cause of the disability.
Even in those plans that do not distinguish on the basis of cause, they often have exclusions for pre-existing medical conditions. The Equal Employment Opportunity Commission has long given advice that use of pre-entry physicals for the purpose of identifying pre-existing medical conditions is not a violation of the Americans With Disabilities Act so long as the existence of a medical condition does not otherwise prevent membership in the retirement plan.
III. Causation.
In most plans which require a determination of cause, the question of whether a disability arose in the line of duty is often not a simple determination. In some plans, only sudden unexpected events give rise to a disability. This means that the injury must be sustained from an unexpected event, as opposed to activities ordinarily undertaken in the course of the performance of duty.
More commonly, line-of-duty disabilities must be shown to arise simply from the course of employment. A number of issues can be impacted from this process.
Must the disability arise solely from the incident or can an accident that triggers a latent condition be sufficient to qualify? To what extent do the ordinary stresses of work qualify as a disabling event?
Many disability programs also provide a presumption in the case of certain occupational diseases such as heart and lung disorders. In the case of such presumptive causes, the only issue established is causation, not the issues of whether the disability is permanent or total. In addition, the plans often distinguished between presumptions which are rebuttable and those which are not. The nature of the presumption will also affect the tax status of the benefit.
Psychiatric disabilities pose particular problems for retirement plans in that many systems do not perform pre-entry psychological exams to determine the existence of any pre-existing conditions. Additionally, there is a substantial dispute at present about whether the ordinary stresses of the job may constitute the basis of a psychological disability or whether there must be some extraordinary event.
IV. Permanency.
Most public employee retirement systems do not provide benefits for temporary disabilities. Disabilities must be permanent. Generally, a disability is permanent if, within the realm of reasonable medical probability the condition is unlikely to improve.
This raises the question of whether as part of the disability process, invasive medical intervention may be required or whether retirement plans have the authority to engage in rehabilitative treatment. A number of retirement plans have adopted policies requiring employees to undergo non-invasive treatment as a condition of determining the question of permanency or have found it more cost effective to send members to “pain clinics” or “work hardening” centers in an effort to assist partially disabled members with the physical discomfort of their conditions.
The question of permanency also gives rise to the issue of reinstatement. If a disability is permanent, how then can a member be subject to reexamination? Most plans provide for reexamination, either by periodic or random examination. The legal issues associated with reexamination will be dealt with below.
V. Totality.
In most plans, in order to receive a disability retirement, a member’s disability must be total. Generally, percentage of disability as referred to in medical reports is irrelevant to the question of whether or not the disability is total for pension purposes. A disability is generally total for retirement plan purposes when the member is prevented from performing within his or her classification or within the employer’s work force.
The definition of totality will give rise to the question of whether or not a member may be required to be rehabilitated outside of the member’s job classification. If a member is capable of performing service but no job exists, is the member still totally disabled? Can an employee be too disabled to work but not disabled enough for a pension?
Similarly, the question of totality will find different definitions in retirement plans than it will under the Social Security laws or Worker’s Compensation laws. Generally, the standards of one are irrelevant to the determination of the other unless the pension plan document specifically adopts the other’s statutory standard. As retirement performs a different function than does Social Security disability or Worker’s Compensation, retirement boards have generally been free to make their own determinations on the question of whether a disability is total.
VI. The Application Process.
All plans should have a standardized format for application for disability. This provides for uniformity of information gathering and prevents against claims that members were denied equal protection of the law in the manner in which their disability applications were processed.
All disability applications should expressly provide for access to any medical information, not just that provided by the member. It should include access to all medical providers who have treated the member as well as medical records and collateral proceedings such as Worker’s Compensation or Social Security. While the standard may not be the same, medical information may not be consistently reported on all applications. The absence of such uniformity may lead to questions as to the veracity of the disability application.
The application process should also question the employer as to the nature of whether or not alternate work within the member’s medical limitations is available. Employers are not required to provide sheltered employment but may have policies in place which favor disabled employees who are otherwise capable of performing a substantial number of tasks within the job classification.
The application should also contain a specific release authorizing the board to discuss amongst itself and with staff all issues related to the disability application. While states are divided on the question of whether disability applications may be handled in a closed or “executive” session, members who have been unsuccessful in their disability applications have sought judicial review complaining that they did not authorize public discussion, thereby seeking to avoid a result which is unfavorable on its merits.
Many plans have statutes of limitations or other time limits for the filing of disability applications. The definition of disability as it applies to such limitations should be clearly explained to members. More than one employee has been denied access to the disability process because the date of accident and the date of disability may have been different. Not all injuries are known to be disabling on the date of occurrence yet, if the plan bases the limitation period on the date the employee was “injured,” then an application for disability retirement may be required even before the permanent or total nature of the disability has been determined.
As part of the application process, the plan should also obtain the job and task descriptions of the position which the member occupies. This would be of substantial assistance to a medical provider who reviews the application.
VII. Managing Medical Information.
It is important that medical reports received by the retirement plan be plain and understandable. Medical providers, including rehabilitation or vocational specialists, should be asked simple, direct questions to determine whether a member’s disability is permanent and total and, where appropriate, service-connected.
Often medical providers will give lengthy narratives using unexplained or undefined medical terms that may leave the board or staff without appropriate guidance on the true nature of the disability. An executive summary or plain language explanation should be required of all medical providers. If the physician upon whose report the fund relies does not appear at any meeting or hearing on the question of disability, a process for the staff or board to question the physician is essential. Due process may also require that the physician be available for questioning by the applicant. This issue will be discussed in the due process section.
The question of whether a member is totally disabled is not always a medical one. Vocational rehabilitation counselors should be employed to answer what is essentially a functional rather than medical question. While medical providers can determine the existence of physical or mental disorders and can identify the limits which those disorders may cause, that does not necessarily translate into the question of totality. The degree to which physical limitations prevent an employee from performing a particular job will be dependent upon the nature of the employer and the circumstances in which the job is performed.
In providing medical information, it is essential that all available sources of medical reports be reviewed. Employees will often report different things to different doctors, thereby making files from Worker’s Compensation, third-party liability suits or Social Security essential to a complete medical analysis. Retirement funds are generally entitled to settle disputes relating to conflicting evidence. As the applicant generally has the burden of proof, it may be necessary for the hearing officer or pension board that conducts the factual review to resolve diametrically opposed medical opinions. Generally, if competent medical opinion, related to the field at issue, can be found in the record then the fund’s reliance on that information to the exclusion of a greater number of medical providers is entitled to judicial deference.
VIII. Due Process.
Many disability claims can be resolved simply on the fact of the information provided. In other words, the evidence of disability may be so compelling that an evidentiary hearing is not required. In cases where the proof is less clear, however, a hearing may be necessary.
It is generally the applicant’s burden of proof to establish entitlement to disability. Conversely, it is generally the fund’s burden of proof to establish that a member is no longer disabled, once a benefit has been granted.
Proceedings before the retirement board do not need to have the same formality as courts. Factual inquiries may be conducted by staff members and reported to the board; administrative law judges or hearing officers may be used; a committee of the board may serve as a hearing panel or the board itself can conduct the disability inquiry.
The essential elements of due process are notice; an opportunity to be heard; an opportunity to cross-examine adverse evidence; a decision made based solely on the evidence in the record; a neutral decision maker; and an order containing findings of fact and conclusions of law.
Any fund which does not have a written hearing procedure for disabilities should establish one. Inconsistency in the consideration of disability applications may give rise to a successful equal protection or due process denial claim which would result in either a rehearing or a court deciding the question of disability. Courts are particularly inexperienced in the arcane workings of public employee retirement systems. Therefore, it is in the best interest of the fund and its members that judicial involvement be kept to a minimum.
It is equally important that the hearings be fair. No matter who acts as trier of fact, that person or persons should not be approached or lobbied by either the applicant or anyone else with regard to the facts which are to be presented. The trier of fact must be insulated from external influences in the same way that a jury is insulated from outside discussion and comment.
There is generally no one who argues “against” the application. In other words, it is not a true adversarial process. Some boards do appoint an advocate to argue against the disability, particularly where there is a staff recommendation to deny the disability. Such a system can add substantial cost to the disability process but also offers an opportunity to develop contrary arguments which test the validity of the applicant’s claim.
The board’s legal advisor may not also serve as an advocate. If the board’s legal advisor is charged with the duty of advising the trustees or hearing officer on the law to be applied to a particular benefit application, that individual cannot also advocate a partisan position.
Applicants should also have the opportunity to test the validity of the evidence against them. If independent medical reports are contrary to the interest of the applicant, the applicant should have an opportunity either through deposition or through live testimony to challenge evidence against them. Deposition testimony carries the same weight as live testimony.
Due process issues have been raised with regard to reliance solely upon written medical reports. While administrative proceedings generally allow hearsay evidence (evidence outside of a formal proceeding which is not under oath), hearsay evidence is generally not permitted to form the sole basis of an agency’s decision. Written medical reports cannot be cross-examined nor can their veracity be directly challenged. Therefore, reliance solely upon written medical reports may leave the decision-making process open to later judicial challenge.
The issuance of written findings of fact and conclusions of law is required in many jurisdictions. Whether required or not with regard to a particular plan, the use of written orders is particularly useful in limiting judicial review. Courts will generally defer to retirement boards given their expertise in benefit administration. The greater guidance which a court may be given by a pension board’s decision-making process, the less likely it is that a court will reverse that decision. In order for a court to defer to the reasoning of the plan, however, the plan’s reasoning must be explained.
Written orders should specify the date upon which they are filed and should be served on the applicant by both regular and certified mail. Most states have very short limitation periods for appealing retirement board decisions (usually 30 days) thereby making prompt delivery of the order an essential element of due process.
IX. Reexamination.
Many plans provide for reexamination of disability retirees. This presents a number of issues.
It is generally an exercise of the fund’s discretion as to whether to reexamine a disability retiree or not. Therefore, an operating policy should be established to ensure uniform grounds for determination of a reexamination.
Reexaminations also carry the risk that a member will become disabled again at a later time and generally at a higher rate of pay. Many funds have decided to forego reexamination of disability retirees except in cases of identified fraud.
There is also the question of a board’s exercise of discretion in deciding not to reexamine an employee. In at least two circumstances, retirement boards have been sued based on their refusal to reexamine employees. Generally, a board is within its authority to refuse to reexamine an employee if granted that discretion by the plan document. If an employee who is on disability desires to be reemployed in order to take advantage of salary or other benefit increases which have occurred during the period of disability, the member should be directed to the employer to apply for a job. If the employee is granted reinstatement by the employer’s personnel division, then the decision of terminating the retirement benefit becomes ministerial.
X. Detecting Fraud.
Retirement boards should always be vigilant in the case of applications from individuals who are not entitled to the benefits which they receive. The use of independent medical examinations is the best insurance against fraudulent or collusive medical reports provided by the member. At least one state has made it a crime on the part of the medical provider to assist an employee by filing false or misleading medical reports in order to obtain a disability retirement.
Retirement boards are also permitted to utilize private investigators and surveillance in suspected cases of fraud. While most states have prohibitions against interception of oral communications, the observation of an individual through video surveillance obtained without trespass is generally admissible in a judicial or administrative proceeding.
XI. Benefit Offsets.
In order to avoid a windfall to employees who receive both Worker’s Compensation and retirement benefits, many plans provide for an offset in the case where both benefits are received. Generally, the retirement plan should receive the offset in order to avoid employees essentially paying for their own Worker’s Compensation. States are split on the degree to which offsets are permitted with some states forbidding them entirely, some states permitting them without limitation and others permitting offsets when the sum of Worker’s Compensation and pension benefits exceeds the employee’s salary at time of disability.
There are also issues concerning what elements of a Worker’s Compensation award are to be considered for the purposes of an offset. In the case of lump sum settlements, Worker’s Compensation awards may contain amounts for attorney’s fees, litigation costs and future medical benefits. Courts are split as to whether those constitute amounts which may be subject to offset. If the plan document is silent on the question of offset, it may not be within the fund’s authority to create one. Similarly, prior misapplication of the offset process may not be used as a basis to avoid its correct application in future, unrelated cases.
XII. Tax Treatment of Disability Benefits.
Under Section 104(a) of the Internal Revenue Code, service-connected disability benefits which are “in the nature of Worker’s Compensation” are exempt from federal income taxation. In order to meet that test, benefits cannot be based on years of service but must generally be a fixed sum or percentage of the employee’s salary. In the case of an employee who, because of long service, receives a benefit which is greater than the plan’s specific minimum disability benefit, only that amount over and above the fixed amount would be subject to taxation.
Non-service-connected disability benefits are considered ordinary income and taxed accordingly. If paid in substantially equal payments, they are not subject to any early distribution penalty.
Presumptive disease clauses present special tax problems. If the presumption is not rebuttable; that is, it cannot be overturned, then the benefit will not be considered as service connected. Only if the presumption is capable of being rebutted will the Internal Revenue Service treat the disability benefit as service connected. The stated reason for this distinction is that in the case of rebuttable presumptions, evidence which would show that the injury or illness was in fact not job related and therefore not in the nature of Worker’s Compensation, must be considered. In the case of an irrebuttable presumption, no such issue is present.