Carstens v. United States Shoe Corporation’s Long-Term Benefits Disability Plan, 2007 U.S.Dist.LEXIS 96094 (N.D.Cal. 10/31/2007)(Issue: Offsets).  This ruling offers new and significant insight into how it may be possible to avoid offsets of dependents’ Social Security disability benefits.  The Plan provided that monthly benefits are offset by: "payments or other compensation described in the applicable Offset Provisions below and which, for that month, are payable to the Employee, or to his spouse or children on the basis of the Employee's employment and earnings record." The document further allows an offset for:

"Periodic benefits, for loss of time on account of the Employee's disability, under or by reason of - (1) any insurance or any health or welfare plan or other employee benefit plan where the Employer; directly or indirectly has paid all or any portion of the cost or made payroll deductions; (2) the United States Social Security Act as amended from time to time, exclusive of benefits paid to a former spouse of the Employee or to a child of the Employee residing with such former spouse.  

The key phrase is “loss of time;” and the court determined that Social Security dependent benefits do not properly fall under that heading.  The term “loss of time” means 

income a person can no longer earn after sustaining either a permanent or temporary disability. Insurance policies can compensate for both "loss of time" and the disability itself, and many cases have found that "compensation for the disability and compensation for the lost time are two different things." Couch on Ins., 3d Ed. (2007) § 182.9.

*6.  The court went on to cite cases that insure against both total disability and “loss of time” which protect the insured against disabilities “that result in the insured’s inability to perform any occupation and those that prevent the insured from performing the duties his current employer requires.” Id. (citing Snelson v. Penn. Life Ins. Co., 65 Ill. App. 2d 416 (5th Dist. 1965)).  Although the court recognized that many cases have allowed offsets of childrens’ Social Security benefits, those decisions all involved situations where the benefit plans classified such payments as support payments.  However, children’s Social Security benefits are not a substitute for the disabled parent’s lost income – “i.e., ‘loss of time.’ Rather, they are payments to children "for the purpose of their support and maintenance." *8-*9.  The court acknowledged that Lawrence v. Prudential Ins. Co. of Am., 2005 WL 2671357 (W.D. Wash. Oct. 19, 2005) found dependent benefits to constitute “loss of time” benefits; however, there was no dispute raised by the plaintiff and the court found the case distinguishable.  Another case cited by defendant, Coop. Benefit Adm'r. v. Whittle, 989 F. Supp. 1421 (M.D. Ala. 1997), was also distinguished because the court never considered the issue of whether dependent benefits qualify as "loss of time" benefits.

The court also cited the Social Security statutory scheme as supporting its conclusion that childrens’ benefits may not be classified as “income replacement.”  Such benefits are “designed to replace the support the[ ] children would have received had their parents continued to work.” *10 (citing Matthews v. Lucas, 427 U.S. 495, 507-508 (1976); Mornes v. Chater, 91 F.3d 1403, 1404-1405 (10th Cir. 1996); Trammel v. Bowen, 819 F.2d 167, 169 (7th Cir. 1987)).  That conclusion is further supported by the fact that the benefits continue even after the parent dies.  In addition, the law mandates specific uses for the benefits which, according to the court, makes it clear that there was no Congressional intent to have the benefits considered “loss of time.”  The court explained:

Although the benefit check is sent to the parent, it is specifically for the dependent child's use. Id. The parent can only spend the Social Security benefits on the child's needs and must complete an annual accounting to document how the money was used. Id. Further, if there are remaining funds, the parent must place them in an interest-bearing account and cannot simply put them to the family's use. Id. at 12. Finally, if the dependent child dies, the remaining funds go to his or her estate, not to the parent. *12.

Citing In re Unisys, 97 F.3d 710, 717 (3d Cir. 1996), the court pointed out that the parent, acting as representative payee, “is not the recipient of the benefits, but rather a person the SSA can trust to administer the funds in the child's interest.” *12-*13.  Finally, the court dismissed the defendant’s argument that the benefit is calculated based on the disabled parent’s income by finding the method of calculation was “not dispositive.  Congress intended to replace the support a child with disabled parents recently lost, and could reasonably choose to do so by relating benefits to the parent's former income.” *13.

Discussion:      The approach taken in this ruling means that it is important to carefully examine the offset provisions of all disability insurance plans and contracts to see if this ruling would benefit the situation.