Can my severance agreement eliminate my right to claim disability insurance benefits?

It is a common occurrence for a disabled employee to be offered a severance agreement when they can no longer work due to a disabling medical condition. An employee must take great caution as the severance agreement may eliminate all future rights to any short or long term disability benefits. Here is an example of a potential client that recently contacted us. Employee began working in the finance department of a local University. For many years he struggled with and was treated for depression and anxiety, which he was able to manage. Recently, however, it began impacting his job performance at the University. The employee had been working with the University for less than 12 months when he filed for disability. He was notified by his supervisor that his work had become “substandard” and the University was evaluating whether to re-assign him to a new position or provide him with a severance package. Although the Employee wanted to explore filing a claim for disability benefits, he: (a) stopped taking his prescribed psychiatric medications more than two (2) years earlier; and (b) had not treated with a mental health professional for nearly two (2) years. In short, he lacked any medical support for his disability. Additionally, because he had been employed at the University for less than one year, the Long Term Disability (LTD) Plan’s Pre-Existing Condition limitation was also a factor. Given these fairly significant obstacles, the Employee determined he would continue to work as best he could while seeking appropriate treatment for his conditions. Once he re-established treatment he would consider filing a disability claim.

Several weeks later the Employee contacted counsel to review an executed Severance Agreement he signed with his now former employer. The Employee wanted to further discuss how he could establish a claim. The Employee was relying on a provision in the Severance Agreement that stated, in relevant part, that the University “agrees to pay [Employee] three months at his current salary…and benefits through May 15, 2016.” In short, the Employee believed that he would be entitled to file a claim for disability benefits through May 15th. However, after reviewing the University’s self-funded STD Plan and fully insured LTD Plan (both administered by the same carrier) it was clear the Employee would be excluded from coverage under both Plans because his coverage ended when he was no longer a “Member” (i.e., Actively at Work) eligible for coverage. In fact, both Plans specifically stated that employees no longer at work as part of a “severance agreement” were no longer eligible for coverage. Had the Employee consulted an attorney prior to signing the Severance Agreement, he would have been alerted to this critical eligibility issue and, quite possibly, could have avoided this harsh result.

This is an unfortunate, but not uncommon, set of circumstances. Employees trust that their Employer understands and considers all the terms and provisions in their employee benefit plans when drafting various employment agreements. Unfortunately, this is not the case. Time and again employees enter into agreements believing they remain eligible and covered only to learn from the insurance carrier that they are not. The simple truth is, regardless of what is said or promised, an Employer is not authorized to alter or amend the specific terms of a Benefit Plan Document (i.e., the Insurance Policy). Here, the University was not authorized to alter or extend the specific “actively at work” eligibility provision of the Plan and, therefore, the Employee’s disability coverage ended once he executed the Severance Agreement. Contact any of our disability insurance lawyers to discuss how we could assist you.

Comments (17)

  • Mark: You should consult an employment lawyer to review the severance package to determine what, if any, impact it may have on your state disability benefit.

    Jay Symonds Apr 22, 2021  #17

  • I am on State disability, and I am not sure not sure if I will be able to return to work. My employee offers me a severance package. If I take the severance package, will I still be able to collect State disability? Thank you.

    Mark S. Apr 22, 2021  #16

  • I am on short term disability and my company restructured and created a new position for salon managers to apply. How ever due to my disability ms I was unable to complete the application resume and apply for the new position. I received a call from my supervisor saying maybe I should apply a position closer to home because our store is a high volume and would I be able to perform the duties… in my current state no but when my relapse subside yes… the position at my store was filled early and with me being able to apply at the time due to my disability. All the employees that did not apply are being offered a severance as position will be terminated as of oct 31. Also if I am currently receiving short term disability payment when my position end will I be able to collect my severance as well.

    Marshel H. Oct 28, 2020  #15

  • I have been on long term disability for two years for mental health. My long term disability ended and my employer wants me to voluntary resigned. My employment record shows 15 years and it is a wall street consulting company.

    JulieAnn D. Oct 27, 2020  #14

  • Barb, please contact us as signing any severance agreement might force you to surrender your rights to make a disability insurance claim. We offer a free consultation and are more than happy to review your severance agreement to see what rights you may be giving up.

    Alex Palamara Oct 12, 2020  #13

  • I have been under doctor care for severe bilateral arthritic knees past two years. I was let go of my job of 13 years on 10/9 with 8 other people. I had short term and long term benefits but did not use them while working. I was working on my weight to be able to get knee surgery. My knee surgery is scheduled for 10/19. My severance package is coming today. The offer help on resume writing in the severance details. I’m not sure I can use until later in my recovery. I’m cashing out my 401k to pay off 3 major bills. I’m not sure what to do about signing agreement. Can I ask for adjustments in the agreement. What are my rights since company did not have written notice of my disability but they saw me walking with known disability. I will be laid up for a long while recovering from this. I need the 26 weeks severance money to pay bills. I need the medical coverage they are offering me the next 26 weeks. I have not said anything to them because I don’t want them taking away my severance offer. I’m just don’t know. I don’t know my rights. I’m in Ohio.

    Barb Oct 12, 2020  #12

  • Anthony, you would need to speak to and hire an attorney as I cannot give legal advice without being retained.

    Rachel Alters Sep 17, 2020  #11

  • I am currently on short term disability and being asked to sign a document with my organization to receive severance. The verbiage is as follows: “The claims covered by this Release include but are not limited to the following, to the extent such claims may be waived or released under applicable law:

    any claims under any federal, state or local law, including, but not limited to, the Americans with Disabilities Act, the National Labor Relations Act, the Employee Retirement Income Security Act of 1974 (“ERISA”) including, but not limited to, breach of fiduciary duty and equitable claims arising under 1132(a)(3) of ERISA, Title VII of the Civil Rights Act of 1964, the Vocational Rehabilitation Act of 1973, the Age Discrimination in Employment Act of 1967 (“ADEA”), as amended by the Older Workers Benefit Protection Act of 1990, the Civil Rights Acts of 1866, 1871 and 1991, including Section 1981 of the Civil Rights Act, the Family and Medical Leave Act, the Worker Adjustment and Retraining Notification Act (all as amended), the Fair Credit Reporting Act or other federal, state or local laws relating to background checks, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street and Consumer Protection Act, the New Jersey Conscientious Employee Protection Act, any other federal, state or local statute or regulation related to whistleblowers and retaliation, state or local wage and hour laws, including but not limited to claims for overtime, minimum wages, premium wages, penalties, liquidated damages or interest under the California Labor Code and the Industrial Welfare Commission Wage Orders, or state or local laws against discrimination, including but not limited to the California Fair Employment and Housing Act; and”

    Will I lose by short term disability payments and the possibility of going on permanent disability if I sign?

    Anthony C. Sep 17, 2020  #10

  • John, if you are filing for disability with a private insurance company they may consider any money you receive form a separation agreement could be offset from your disability benefit.

    Rachel Alters Apr 4, 2020  #9

  • I have seen offered a separation agreement. I am also filing for medical disability. Should I hold off signing and returning the separation agreement?

    John H. Apr 4, 2020  #8

  • I am on short term disability, fell off a ladder (at home) and shattered my right (driving) heel, requiring surgery and screws. I went on disability and my employer who doesn’t fall under FMLA regulations, gave me a separation of employment and 1 month severance. I need to remain on short term disability a little while longer, until I can drive myself to a job. Do I have to disclose this 1 month severance payment as income to the EDD??

    Karen Mar 6, 2020  #7

  • Robert, unfortunately, the questions you ask have multiple potential outcomes that the only answer we could provide is maybe. To best assess your situation please feel free to contact our office to discuss in detail.

    Stephen Jessup Nov 9, 2019  #6

  • If you successfully file a Short Term Disability claim can your employer later terminate you while you are collecting on the claim, and then replace the disability with severance so that you won’t get both the disability and severance? Conversely, after you have been offered severance and are in the midst of the bi weekly severance payments(which includes 12 weeks of paid salary and other benefits including ST disability…can you file for ST disability?

    Robert M. Nov 8, 2019  #5

  • Wendy, it depends on your disability insurance plan. However, separation / severance agreements often have language expressing that you agree to release and waive any claims for benefits under ERISA and your employee benefits. You should consult with an employment attorney regarding your separation and how to negotiate your severance package.

    Cesar Gavidia Aug 8, 2019  #4

  • Can you file a long term disability claim first and get disability; and then seek a severance package due to harassment?

    Wendy A. Aug 8, 2019  #3

  • John, you would still arguably have rights to bring suit against the employer for nonpayment of benefits- though it will take some additional analysis to determine the extent of the liabilities. Please feel free to contact our office to discuss your situation in greater detail.

    Stephen Jessup Apr 13, 2016  #2

  • I worked for a private company for 35 years, the largest in the industry and a company who’s reputation was one of social responsibility and concern for employees. However as this company has seen a significant change in the need for it’s products, it has lost that attribute of social responsibility and began a continuous process of employee reduction by buyouts or termination, mostly with employees with 25+ years of service.

    Approximately 10 years ago, I was diagnosed with heart disease, sleep apnea, restless leg syndrome, and narcolepsy. For many years I could work and manage my medical conditions but as staff reductions increased and workload for employees increased, I was not able to meet their employee expectations and was put under constant pressure to perform or be fired. All employees were being pushed to their limits.

    I was under the care of a highly respected local sleep specialist for 10 years who determined that with the increased work requirements and the fact that the treatments for my narcolepsy were short lived and complicated by my heart disease, I was certifiably disabled.
    I filed for short term disability as required by my company and my case was reviewed by the company nurse and a semi-retired company OD doctor who graduated from an one and a half rated medical college. They rejected my claim and I appealed to my company who sent it to their long term disability insurance company where it was reviewed by a doctor who specialized in aviation. That doctor rejected my claim for short term disability.

    I filed an appeal for STD through the employee/employers arbitration process but again was rejected any benefits. When I filed another appeal for STD and stated my legal reasons why they must provide me with STD benefits, I learned how they legally stacked the deck against giving STD to any employee if they so chose.

    STD benefits are paid out of my company’s general payroll and therefore not controlled by requirements of ERISA and the Federal government. Only the company’s LTD was under ERISA because it was paid out through an insurance provider, however if you were denied STD benefits then you could not apply LTD benefits. To further close the loop, employee/employer arbitration process did not allow any STD appeals to be heard by any outside arbitration judge, just by internal management, although any other employee grievances could be appealed to outside arbitration.

    Sadly, these are the lessons that I learned to late; no matter how great a reputation your company has for doing the right thing, it is best to learn about how your company administrates it’s STD and LTD policies before filing for disability. Be aware whether their disability plans fall under ERISA and if they don’t, then buy a private disability insurance policy because the statistics say you are more likely to be disabled then die before you retire.

    John J. Apr 12, 2016  #1

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