You already know that most ERISA plans allow the Plan to reduce or offset long term disability payments by amounts the disabled worker receives from workers compensation or Social Security.

But it is trickier when you try to offset payments received from lump sum personal injury settlements. Some ERISA Plans have “presumed allocation for offset” provisions that help determine how much of a lump sum settlement can be offset.

But some state statutes “conclusively establish” how to allocate lump sum personal injury settlements, which complicates things.

Here’s the case of Arnone v. Aetna Life Insurance Company, 2017 WL 2675293 (2nd Cir. June 22, 2017)(New York state statute, governing lump sum personal injury settlements, prohibited offset of ERISA-governed long term disability benefits.)

FACTS. Arnone, an account executive for Konica, obtained ERISA-governed disability benefits after slipping and falling in a puddle. Aetna then properly reduced benefit payments by worker compensation and Social Security benefits received, lowering his monthly payment to $114 per month.

But then Arnone received an $850,000 lump sum personal injury settlement. The ERISA plan contains a “50% provision,” which states that when a lump sum personal injury settlement is not apportioned between pain and suffering, medical expenses or lost income, then “50% will be deemed to be for disability.”

Aetna determined this provision reduced its obligation by $275,550. Arnone argued however, that New York Statute 5-535 (which presumes that personal injury settlements do NOT include loss of earnings) precluded Aetna from offsetting 50% of the settlement amount. When suit was filed, Aetna also brought a $40,000 counterclaim for overpayment.

DISTRICT COURT HELD: Summary Judgment for Aetna. The New York statute did not apply; Connecticut law governed.

SECOND CIRCUIT HELD: REVERSED: New York Statute Determined Allocation of Lump Sum Settlement; Offset Prohibited

  1. New York Statute 5-535 establishes a “conclusive presumption” that personal injury settlements “do not include…loss of earnings…” Op. at 13. (Emphasis added.)
  2. Section 5-335 is saved from express ERISA preemption. Op. at 15.
  3. The Plan’s Choice-of-law provision, which states that the Plan will be “construed” in accordance with Connecticut law, “does not encompass the matter at issue in this case…. Section 5-335 is not a statute of contract construction or of contract interpretation….and does not modify how benefit plans are ‘construed.’ It provides a rule to which all contracts between an insurer and an insured must adhere.” Op. at 16.
  4. The Court concluded “Aetna erroneously overlooked the law’s provisions when it acted on its conclusion that 50 percent of the net proceeds from Arnone’s personal injury settlement were “for disability” such that Aetna was permitted to reduce Arnone’s disability benefits in offset.” Op. at 21.
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Photo of Mike Reilly Mike Reilly

Mike Reilly is a nationally recognized labor, employment and employee benefits attorney, named one of the “Top 100 Most Powerful Employment Attorneys in the Nation” for the past five consecutive years by Human Resource Executive®. He has decades of experience providing strategic employment…

Mike Reilly is a nationally recognized labor, employment and employee benefits attorney, named one of the “Top 100 Most Powerful Employment Attorneys in the Nation” for the past five consecutive years by Human Resource Executive®. He has decades of experience providing strategic employment advice, and has represented clients in more than 75 jury trials, arbitrations, bench trials and claims before the EEOC and Washington State Human Rights Commission.

Small and large employers retain Mike for his strategic advice and decades of experience in employment issues and litigation, business decisions and litigation avoidance. Mike provides advice in claims involving discrimination, retaliation, wrongful discharge, disability accommodation, ERISA and non-ERISA employee benefit claims, and wage/hour claims. He served as lead counsel in an employee raiding/trade secret case as reported in the Wall Street Journal, and defends employers in class action claims.

Mike’s remarks on employment issues have been quoted in NewsweekCorporate Legal TimesSeattle TimesEmployee Relations Law JournalPuget Sound Business JournalCFO.com, and other professional journals and management publications. Chambers USA’s Guide to America’s Leading Lawyers for Businessrates Mike in the top ranking (band one) for his work in labor and employment law, and has described him as “one of Seattle’s top-rate attorneys” who is “truly phenomenal [with] superb legal instincts” and “an amazingly assertive litigator.” His clients include Nordstrom, Seattle Seahawks, Home Depot, KeyBank, Starbucks, Fred Hutchinson Cancer Research Center, Red Robin and Seattle Chamber of Commerce, among others.