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Coverage under an employer-sponsored disability insurance plan governed by ERISA can differ significantly from coverage provided by a private disability insurance policy, and these plans are enforced under separate laws. Many physicians, executives, attorneys, accountants, and other professionals know that they have some form of disability insurance, but they have not examined the details in recent memory.

While both ERISA plans and individual disability insurance policies can provide a vital lifeline for professionals who have significant time and resources invested in their practice, there are differences and limitations that must be understood before professionals can choose coverage that provides the right protection for their particular situation. In this post, we explain how federal laws apply to employer-sponsored ERISA plans and how those laws contrast with the state laws that apply to private disability insurance policies. We also review the differences in coverage, enforcement of rights, and other issues.

At Seltzer & Associates, we do not sell insurance, so our aim is not to tout the benefits of one type of disability insurance over another. Our goal is to help professionals understand their coverage so that if the time comes to file a claim, they know what to expect. We assist with the process of filing claims and resolving difficulties if an application is denied or benefits are prematurely discontinued. Here is what high-income professionals need to understand about ERISA and private disability insurance policies.

What is an ERISA Disability Insurance Policy?

The acronym ERISA stands for the Employee Retirement Income Security Act, a federal law first enacted in the 1970s to protect workers from unscrupulous employer practices. It is supposed to safeguard pensions, set requirements for offering health insurance, and govern the provisions regarding other benefits provided by employers, including disability insurance policies.

What Does ERISA Cover?

ERISA laws cover long-term disability insurance policies sponsored by employers. Policies that individuals purchase on their own are not governed by federal ERISA requirements. Professionals who are employed by sizable organizations such as hospitals, law firms, and corporations are often offered the opportunity to participate in an employer-sponsored plan, and this is the type of disability insurance covered by ERISA law and implementing regulations.

What Professionals are Likely to Have an ERISA Policy?

Professionals who may have a disability insurance policy governed by ERISA include:

• Physicians and other medical professionals employed by hospitals
• Financial professionals
• Law firm associates
• Corporate executives
• Engineers and other professionals employed by medium to large businesses

Because these plans are negotiated between the employer and the insurance company, the individual employees do not have many choices when it comes to the terms of coverage. A policy provided through the employer may not provide sufficient coverage to meet a high-earning professional’s needs if a disability interferes with the ability to produce income.

How are Private Disability Policies Arranged?

An individual private disability insurance policy is purchased directly from the insurance company or through an agent, so the policyholder can choose the specific terms they want. This might guarantee more income replacement than provided under an employer-sponsored plan, which is essential for a professional accustomed to a high rate of earnings. It also allows for coverage such as “own occupation” protection and residual disability coverage.

Own occupation coverage provides benefits if you are unable to practice your specific profession. If your plan doesn’t provide this coverage, you will generally only be able to receive benefits if you can prove that you’re unable to work at any occupation, which is much more difficult. Residual disability coverage provides benefits to make up for lost income when you suffer from partial disabilities that do not prevent you from working altogether, but that limit the tasks you can perform or the number of hours you are able to spend practicing your profession.

What are the Key Differences Between ERISA and Private Disability Insurance Policies?

The most critical distinctions between ERISA and private individual disability insurance policies involve the laws that govern them, the process of negotiating policy terms, and procedures for appealing unfavorable decisions. The laws that govern ERISA policies establish processes for appealing decisions that can limit a policyholder’s ability to make a strong appeal. In disputes involving ERISA policies, courts may not have jurisdiction to decide certain issues; it can be difficult to introduce evidence, and a case usually cannot be decided by a jury.  

To understand how ERISA disability insurance policies can differ from individual insurance policies, it is helpful to compare factors:

• The terms of ERISA plans are negotiated by the employer
• The terms of individual policies are negotiated by the policyholder
• ERISA plans are governed by federal law
• Individual policies are usually governed by state contract law
• Disputes regarding ERISA coverage usually must be appealed internally
• Disputes regarding coverage under individual plans can sometimes be appealed immediately in court
• Federal law generally prohibits claims alleging that an insurer has acted in bad faith on an ERISA claim
• State law usually allows bad faith claims regarding an insurance company’s handling of a private disability insurance claim
• Federal law allows court review of actions on ERISA disability insurance policies
• State laws allow greater review of actions on private disability insurance policy claims

What Happens if I Have a Dispute About an ERISA Policy?

Because long-term disability insurance policies that fall under the ERISA umbrella are heavily regulated by federal law, you need to follow specific procedural requirements if you have a dispute about a claim. Deadlines established by the insurance company and federal law must be followed rigorously.

It may not be possible to submit additional evidence to support your claim later, so you need to gather all the evidence you can. This includes:

• Medical records
• Statements from your physician explaining the extent of your disability
• Vocational evidence showing how your disability prevents you from performing your job
• Any other evidence of functional limitations

You will need to file an appeal through internal processes at the insurance company first. If that appeal is denied, then you may have the opportunity to appeal the decision in federal court, but your appeal will be based on the evidence you submitted earlier. That is why it is helpful to work with an experienced attorney throughout the appeals process to ensure that the most effective available evidence is submitted during the initial appeal.

FAQs About ERISA vs. Individual Disability Insurance Policies

How can I tell if my disability policy is governed by ERISA?

ERISA only applies to employment benefits offered to employees in the private sector, so if you purchased or obtained coverage through work and your employer is not a government entity or church-affiliated organization, it is likely subject to ERISA rules. Otherwise, it is probably governed by state law.  

What is the “Safe Harbor” exception to ERISA rules?

An insurance plan sponsored by an employer is exempt from ERISA rules if it meets four specific requirements that qualify for the “Safe Harbor” exception established by the U.S. Department of Labor in 29 CFR 2510.3-1(j). A plan is not governed by ERISA if:

• The employer (or an employee organization) does not financially contribute to the premiums
• Participation in the policy program is voluntary
• All the employer does is allow the insurance company to publicize the program or  collect premiums that are passed to the insurance company
• The employer gets no financial benefit from the program other than reasonable compensation for the expenses involved with collecting and remitting premium payments

What is an administrative appeal and why is it so important in an ERISA claim?

An administrative appeal is a procedure in which the insurance company is asked to reconsider a decision made regarding a claim. It is so important when a decision involves a policy governed by ERISA because federal rules require all evidence to be submitted no later than the administrative appeal. If the administrative appeal is denied and the claimant wants to take the case to court, the court’s decision will be based solely on the record established in the administrative appeal.

Are there different deadlines for claims under ERISA policies compared with individual disability insurance claims?

Yes, the deadlines are often substantially different. ERISA policies follow deadlines set by federal law. For instance, if you want to appeal the denial of a claim under an ERISA policy, you must do so within 180 days. Private individual policy deadlines are determined by policy specifications as interpreted under state law.

Do ERISA disability insurance policies define “disability” differently than individual disability insurance policies?

The definition of a disability that qualifies for benefits under a policy is set forth within the policy documents, so an ERISA policy may or may not use the same definition as an individual policy. It is vitally important for high-earning professionals to be familiar with the definition in their policy and understand when they are entitled to benefits and when they are not. If an ERISA policy has a very restricted definition of disability, it can be helpful to purchase additional private insurance that covers situations not covered by the ERISA policy.

Seltzer & Associates Answers Your Questions and Works to Resolve Difficulties with Private Disability Insurance Policies

Disability insurance is complicated, whether governed by ERISA or state law. At Seltzer & Associates, we know what a valuable lifeline this insurance can be for professionals, but we also know that when it comes time to file a claim, professionals end up disappointed far too often. Sometimes the problem stems from misunderstandings about coverage, but other times, the insurance company fails to honor its obligations under the policy.

Our attorneys have decades of experience helping professionals in Pennsylvania and throughout the U.S. recover the resources they deserve under their disability insurance policies. If you have questions about your coverage, need help filing a claim, or would like assistance with an appeal, we invite you to contact us for a free consultation.