Every group long-term disability insurance policy provides for a benefit equal to a certain percentage of your income, typically 60%. But when it comes to defining pre-disability “income,” there is tremendous variance between disability insurance policies. That variability can dramatically affect what percentage of your take-home income would be paid in the event of a disability and can lead to far less income replacement than anticipated. Your long-term disability benefit may wind up being a fraction of what you actually earned because your bonus, commissions, differential pay, or other forms of compensation were left out. The time to obtain an understanding of what your disability benefit will be should not occur after disability begins. Knowing your potential benefit should be ascertained at the beginning of each year of employment so that if additional disability insurance is needed, it can be purchased before it is too late.
Key Takeaways
- Whether bonuses, commissions, or other forms of compensation count depends on how your policy defines pre-disability earnings.
- Many group long-term disability plans base benefits on base salary only, so benefits can replace far less income than expected.
- Equity compensation such as restricted stock or stock options is usually excluded from group coverage.
- Both the earnings definition and the insurer’s math should be reviewed annually since an employer’s decision to change disability insurers may also impact the benefit payment.
What Counts as Pre-Disability Earnings?
Your policy’s definition of pre-disability earnings spells out exactly what forms of compensation are or are not covered. These are some of the common types:
- Base salary only. Many long-term disability plans specify pre-disability income as salary only. Bonuses, commissions, and differential pay are often excluded by name.
- W-2 earnings. If the definition specifies W-2 earnings, it would encompass bonuses and commissions.
- Partner or K-1 compensation. For partners and owners, the policy often looks to earnings from a prior tax year.
- For owners of businesses or professional practices established as Subchapter S entities, some policies include the owner’s share of the business profits.
- The measurement period. Every definition names a time frame: your pay rate on your last day of work, the prior tax year, or an average over a longer period of time.
How Insurers Calculate Benefits When Your Pay Varies
Insurers typically average variable pay over a look-back window, and the window chosen can raise or lower the benefit.
- Averaging periods. Twelve and 24 months are common.
- A bonus paid just outside the window may not count at all. That means a bonus for a prior year that is not paid until the subsequent year may not be taken into consideration. Same goes for commissions.
- W-2s, commission statements, and bonus plan documents may prove the amount of income to be counted and expose errors.
- Benefit caps. Group plans set a monthly maximum, which hits high earners hardest.
What Cheney v. Standard Insurance Company Means When Your Final Year Was Not Typical
We represented a law firm partner whose group policy based the benefit amount on earnings received during the “prior tax year.” Which year applied turned on her last day of “active work,” which was significant because the insured had been on an unpaid leave of absence during most of the prior year. If disability were established in a later year, however, the benefit amount would have been far higher. In 2015 the district court chose the higher, more representative year. However, in 2016, the U.S. Court of Appeals for the Seventh Circuit vacated that ruling, reading the active-work language strictly, but it observed that the policy might allow counting only the months she was actually paid.
What this means for you: if your earnings fell before your date of disability, your benefit amount could be markedly affected.
Are Stock Options and Other Forms of Deferred Compensation Considered Pre-Disability Income?
Usually not under group long-term disability coverage, and this is where the replacement gap may be the largest.
- Typical group plan definitions exclude equity compensation, including restricted stock units (RSUs) and stock options along with other forms of deferred compensation.
- A benefit that replaces a percentage of covered earnings can replace a far smaller share of total compensation when pay is equity-heavy.
- The plan document and the summary plan description (SPD) define whether such payments constitute income.
When Your Group Policy Misses Most of Your Income
First, confirm the benefit calculation is consistent with the policy terms. Miscalculations can be challenged, and under an ERISA-governed plan that starts with an appeal to the insurer.
How DeBofsky Law Handles Variable-Compensation Claims
- Obtain the plan documents and claim file. We need to see the governing language, not a summary.
- Audit the benefit calculation. We test the insurer’s math against the earnings definition.
- Assemble the earnings record. Tax forms, commission statements, and grant documents.
- Challenge miscalculations. We challenge errors made by disability insurers through the pre-litigation appeal process.
- Litigate when needed. If the insurer will not correct it, we can take them to court.
Talk to DeBofsky Law About Your Variable-Compensation Claim
If your benefit calculation is less than what you were expecting based on your earnings, contact us to book a consultation. We will review the policy language and the insurer’s math with you.
Frequently Asked Questions About Bonuses, Commissions, and Stock in Disability Claims
Are bonuses and commissions included in my long-term disability benefit?
It depends on how your policy defines pre-disability earnings. Some definitions count base salary only; others count W-2 earnings, which include bonuses and commissions. Check the policy language first.
Do stock options and RSUs count as pre-disability earnings?
Usually no. Most group plans exclude equity or other forms of deferred compensation, so the benefit can replace a much smaller share of total pay. The plan document controls, and some employer or individual policies differ.
How do insurers calculate benefits on commission income?
Most policies include commission earnings, but some do not. There is also variability in how commission earnings are calculated since there is often a lag between when the services were performed and when the commissions are paid.
What if my earnings dropped before my claim because I was already sick?
The measurement period and your last day of active work matter. In Cheney v. Standard Insurance Company, a case this firm litigated, the Seventh Circuit applied that language strictly, while noting that months of unpaid leave might be excluded from the calculation.
What can I do if my benefit misses most of my real income?
Start with the plan documents and confirm the insurer applied its own definition correctly. Where there is a coverage gap, supplemental and individual disability insurance policies exist; explore how to secure such coverage with a qualified advisor.
