By:  Ian Morrison, Alexis Hawley and Sam Schwartz-Fenwick

On March 2, 2012, in Schultz v. Aviall, Inc. Long Term Disability Plan (Case No. 11-2889), the Seventh Circuit held that two private disability insurance plans may reduce payouts by the amount a participant’s children receive in Social Security benefits as a result of the participant’s disability.

Both disability plans at issue in the litigation required offsets for “loss of time” Social Security benefits and explicitly included as “loss of time benefits” amounts paid to the primary beneficiaries as well as amounts paid on behalf of their dependent children.  As a result, the plans reduced benefits based not only upon Social Security benefits paid to the participant, but also benefits payable to the participants’ children.  Plaintiffs challenged this practice, arguing that benefits paid to dependent children did not qualify as “loss of time” and that the deduction of these benefits violated the plans.  In support of their position, Plaintiffs argued that the purpose of Social Security payments to dependent children was to provide support and not to replace lost income as a result of a parent’s inability to work.

The Seventh Circuit rejected Plaintiffs’ interpretation of loss of time benefits, noting that the plan language clearly and unambiguously defined “loss of time benefits” to include payments to dependent children.  Following the vast majority of courts that had considered this issue, the Seventh Circuit held that benefits paid to dependent children were subject to the offset provisions of the plans.  The Court noted that such an interpretation was in keeping with the overriding purpose of disability benefits – to replace lost income.

In reaching its decision, the Court applied a de novo standard of review because the plan documents produced plaintiffs during the administrative process did not confer discretion upon the plan administrator — only the summary plan description did so, which the Court held to be insufficient.  The Court refused to consider language in master plan documents purportedly granting discretion, because those documents had not been produced and were not part of the record in connection with the motion to dismiss.  Of course, given the Court’s finding that the plans unambiguously permitted the deduction at issue, the choice of standard of review ultimately was not determinative.

 The Shultz decision is important not simply because it joins several other courts in holding that ERISA plan benefits may be offset by both participant’s Social Security benefits and benefits paid to dependents on account of the participant’s disability, but also because this conclusion was reached at the motion to dismiss stage.  Because the matter at issue involved a question of plan interpretation and the applicable plan documents were incorporated into the complaint, the Court had no difficulty deciding the question without review of the administrative record or considering any discovery.  Thus, Shultz will be helpful authority for plan administrators seeking prompt court resolution of similar plan interpretation disputes.