I Says What I Means...

The Eighth Circuit allowed a reduction in disability benefits for earnings while receiving benefits in Riddell v. Unum Life Ins. Co. of America (8th Cir. 8/10/2006), and the case contains a useful lesson for any 403(b) or 457 employer.

The policy based benefits on a monthly earnings definition that excluded bonus payments. The policy also head residual/partial disability benefit provisions, under which benefits could be reduced based on "disability earnings" that were defined to take into account bonus payments. The physician receiving benefits under the policy argued that a category of payments he received was in the nature of a bonus, and that those payments should not be used to reduce disability benefits because the two definitions were internally inconsistent. Rather than just calling the argument hogwash, the court more politely pointed out that the reduction provisions always used the "disability earnings" definition and never used the first, and more generally applicable, definition of monthly earnings.

This case may seem unglamorous, but it should remind all concerned of the need to use plan documents that are decently written. In the 403(b) and 457 markets, and retirement plan markets generally, this is not always the case because the focus of drafting is on technical compliance. Try reading your plan documents; if you don't know what they mean, you should ask for an explanation or a rewrite, because the participants won't understand it either.

In 403(b) and 457 environments, there is one particularly important issue to cover, and cover clearly - ERISA/fiduciary status. As long as the funding vehicle is not a trust and the employer or plan are not subject to ERISA (church and governmental, non-plan 403(b) and top-hat 457), the non-ERISA, non-fiduciary status should be crystal clear in the plan document. If the issue might ever come up, it will help a great deal to have a document that clearly states employer/plan status and the ramifications of that status.