One of the economic fallouts from the coronavirus outbreak is the large percentage of workers who are experiencing reduced work hours and therefore, reduced wages. Since disability benefits are generally determined on account of current pay, it is important for plan sponsors to review their short- and long-term disability policies to determine how earnings are defined for purposes of disability pay. Some policies define monthly earnings to be the average gross monthly income from W-2 earnings for the year prior to the date of disability. Others define monthly earnings as the earnings in effect just prior to the date of disability, while others base benefits on earnings over the 12 months preceding the disability. The first definition would mean that a reduction in wages would have no impact on disabilities occurring in 2020 (but could have a later impact, for disabilities occurring in 2021). The last definition would mitigate the effect of a pay cut, depending on the date of the reduction and the date of the disability.

Many insurers are providing an accommodation during Covid for the determination of pre-disability earnings and are basing benefits on earnings prior to a reduction in hours or salary. For example, some insurers are offering a 90-day extension – meaning, if an employee has a reduction in earnings, and becomes disabled within 90 days, the disability benefit would be based on earnings as of the last day of active work prior to the reduction in wages. If the disability occurs more than 90 days after the reduction in wages, the policy language will apply.

Pre-Covid, it was not uncommon for an employee whose performance was affected by a developing disability to experience reduced earnings in the months/years leading up to a claim as the employee became less productive, meaning that any benefits would be based upon an earnings period already impacted by claimed disability. This scenario led some plaintiffs to attempt to “backdate” his or her disability claim, and has been a recurring issue that has been flushed out in disability benefit claims litigation.

The impact of Covid and how wage reductions may ultimately impact disability benefit calculations is a concern that not many employers are thinking about. As we head into open enrollment and contract renewal season, we recommend employers think about how Covid-related wage reductions may impact a disability claim. Plan sponsors should also be sure to circulate proper disclosures describing how disability benefits are calculated, to avoid surprises when benefits are ultimately paid.