Employee Benefits-Seventh Circuit Rules That Children’s Benefits From Social Security Due To Parent’s Disability May Be Applied To Reduce Disabilty Benefits Payable To The Parent By An Employer’s Plan

In Schultz v. Aviall, Incorporated Long Term Disability Plan, No. 11-2889 (7th Cir. 2012), the plaintiffs, Kathleen Schultz and Mary Kelly (the “Plaintiffs”), brought a class action under ERISA, to recover benefits under the long-term disability benefit plans (the “Plans”) maintained by their former employers and issued by the Prudential Insurance Company of America (“Prudential”). The Plans provide for a reduction of the disability benefits if the disabled employee also receives federal disability benefits under the Social Security Act, as both the Plaintiffs do. The issue in the case: How should the reduction be calculated?

The Seventh Circuit Court of Appeals (the “Court”) noted that, when calculating the amount of the reduction of the Plans’ benefits based on the Social Security disability benefits, Prudential had counted both the amounts payable to each plaintiff under 42 U.S.C. § 423 (primary disability insurance benefits) and amounts payable on behalf of their dependent children under 42 U.S.C. § 402(d) (child’s benefits based on parent’s disability). The Plaintiffs contended that the Plans do not authorize Prudential to include the children’s benefits in the amount of the reduction. Both Plans require offsets for “loss of time disability” benefits. The Plaintiffs argued that a child’s Social Security disability benefit based on a parent’s disability is not a “loss of time disability” benefit, and therefore should not be taken into account when calculating the reduction. In the alternative, the Plaintiffs argued that the plan language is ambiguous and should be construed against Prudential. The Court said that, based on the relevant plan language, the district court held that the children’s benefits counted as “loss of time disability” benefits, and dismissed the Plaintiffs’ case for failure to state a claim.

In analyzing the case, the Court said that the Plans’ language on this point is not ambiguous. The only reasonable interpretation of this language-based on the language itself and bolstered by case law- is that, when a disabled employee’s dependent children receive Social Security payments by reason of the parent employee’s disability, those benefits are disability benefits based on the employee’s “loss of time” and are taken into account when determining the reduction in the disability benefit payable by the Plans. As such, the Court upheld the district court’s dismissal of the case.