Long-term disability and ‘un-retirement’

It can take time to resolve an employee's claim for long-term disability benefits, especially in complicated cases. While an long-term disability claim is pending, the employee usually cannot work -- after all, inability to work generally is the basis of an long-term disability benefit claim. So where does the money come from to pay for food and rent -- how about early retirement under a pension plan?

An eligible employee may take an early pension without regard to disability. But early retirement often comes with a substantial price. The pension is lower due to an actuarial reduction from a longer payout period. Additionally, pensions often reduce the long-term disability benefit to avoid similar payments under two plans. So the employee can be substantially penalized for taking an early pension to pay bills when there's a delay in processing a long-term disability claim. Is there a way to avoid this? One possible solution is for the employee to try to "un-retire" -- to retroactively cancel the pension. "Un-retirement" might avoid both penalties, but can it be done?

Many pension plans do not allow un-retirement. Retirement benefits, when started, are fixed for life. There may be an exception if an employee returns to work, but by definition a former employee who receives long-term disability benefits cannot work So now what -- is the employee forever penalized by a choice that was forced on him because he had bills to pay?

The 9th U.S. Circuit Court of Appeals says no. At least not where the disability plan administrator made an error in denying the long-term disability benefit in the first place and later the benefit was granted.

Petar Mrkonjic was denied long-term disability benefits; later he was awarded them retroactively. To pay his bills in the interim, he took early retirement with a reduced pension benefit. After getting long-term disability, he asked to un- retire; his claim was rejected. He sued, won, and the case went back to the plan administrator to calculate the effects. The administrator told him that he had to repay the pension plan more than he would have received in long-term disability benefits. Petar was quite unhappy, so he sued again.

In Petar Mrkonjic v. Delta Family Care and Survivorship Plan, (9th Cir., No. 16-56335 and 16-56487, June 15, 2018, unpublished), the 9th Circuit held for Petar. The court held that the original order only required "appropriate" reimbursement and/or offsets; the plan(s) did not calculate the long-term disability benefits in the usual manner, and that the committee did not follow the district court's order which required only the long-term disability plan (not Petar) to transfer funds. It seems that the 9th allowed Petar to partially double dip. So when all is settled out, it appears that Petar will be able to keep about an extra $60,000 that he would not have gotten if all had been done right to begin with. The majority must have been quite annoyed at the plan administrative committee.

Un-retirement is quite complex and there is no reason to think that a court can effectively sort out the issues -- or even wants to. There are a lot of moving parts to putting the world back where it would have been if long-term disability had been awarded promptly in the first place. This includes determining the retroactive long-term disability amount, reducing it for benefits already paid as pensions but which should have come from the long-term disability plan, making the pension plan and the long-term disability plan whole, correcting the pension plan records to erase the prior retirement, perhaps crediting additional service for benefits, correcting prior tax reporting to the individual and to the IRS and possibly correcting employer-paid taxes, notifying the employee that he may want to file amended tax returns, and perhaps revising the employee's other benefits, and other employee records.

If you want to see how well meaning, attentive judges can become confused by issues like these, look at the YouTube video of the oral argument in Petar's case before the 9th Circuit. No judge is -- or wants to be -- a plan administrator.

There is a better way for everyone to resolve these issues. After the district court decided that Petar was entitled to un-retire (in the first decision) and Petar disagreed with the committee, this case could have been settled in mediation. There, each of the issues could have been listed, briefed, discussed and resolved, or at least clarified for further decision by the court. With mediation, it is more likely that Petar and the plans could have come to agreement on the dollars, the pension plan would have been made whole by payment from the long-term disability plan (which seems to have been what the district court expected) and the complexities of un-retirement could have been resolved or clarified. Moreover, the courts could have been spared a second round of litigation.

Mediation is not a magic bullet, but when there are complexities unsuited for a court, it should be preferred by all parties.