Physician Group Long Term Disability (LTD) is a valuable way to protect your employees’ financial well-being and livelihood. Providing a sound LTD plan is a critical part of a comprehensive — and competitive — employee benefits program. But what about the needs of the company’s physician partners or shareholders? Does your LTD policy provide adequate income protection — or perhaps even contain severe deficiencies — for these highly compensated individuals?
Many physicians and dentists purchase individual disability income protection; a specialized Physician Group LTD program can provide valuable supplemental income protection. Traditional Group LTD plans, however, typically do not provide the kind of protection they needed — leading to great disappointment at claim time. This is especially true for partners or shareholders who receive Schedule K-1 income both before and after a disabling event.
Here are four key questions that partners and shareholders need to ask in regard to their Physician Group LTD plan and Schedule K-1 (Shareholder) income:
1. What earnings are considered when paying a benefit? Most LTD plans pay 50% or 60% of monthly covered earnings, up to the plan’s maximum monthly benefit. Base income is typically used to determine the benefit payable. What about bonuses? Bonuses may not be included unless specifically requested and approved by the insurance carrier. What about K-1 income? Again, this income may not be included unless specifically requested and approved.
2. Why should I include K-1 income if my monthly LTD benefit is already “maxed out” with just my base earnings? This is an often misunderstood question by policyholders and their brokers. There are two important reasons to include K-1 income:
First, most Group LTD policies have an income test to determine if you are disabled (apart from a loss of duties test). Typically, claimants must be earning less than some percentage — often 80% — of their pre-disability income. If pre-disability income does not include K-1 income, and especially if K-1 income is being received by the claimant while disabled (because he or she is still a partner/shareholder), then it may be more difficult for claimants to meet the income loss required to qualify for an LTD benefit.
Secondly, Group LTD policies use formulas that include pre-disability earnings when calculating your partial disability benefit — the higher your pre-disability earnings, the higher your partial disability benefit will likely be. One quarter of medical professional claimants are partially disabled, so this is a critical aspect of your Group LTD plan.
3. What earnings am I allowed to receive while I am disabled — and still qualify for a disability benefit? As noted above, most Group LTD policies have an income test (often 80%) as part of the qualification for disability. If you receive K-1 income while disabled (because you are still an owner/partner/shareholder) and this income is considered current earnings, and especially if this income is combined with partial work income, then it may be difficult for you to qualify for an LTD benefit because it may appear you do not have the required loss of income. Ideally, you want a program that includes K-1 earnings in defining pre-disability income, but Excludes it from calculating your current income while disabled.
4. What earnings can reduce the monthly LTD benefit I receive? Let’s assume you qualify for disability and you are expecting to be paid a monthly LTD benefit. How much will you actually receive? While you may assume you will receive the maximum benefit amount, you may be surprised at how severely your K-1 income reduces your benefit amount. Here’s how this can happen:
Partial Disability (working while disabled) – Some carriers include K-1 income as part of your current monthly earnings or disability earnings. When they determine your partial monthly LTD benefit, K-1 income results in a reduced LTD benefit (the actual reduction depends on the formulas used in the policy, which can vary from carrier to carrier).
Total Disability – Even if you are totally disabled, your LTD policy may consider K-1 income as a direct offset or other income, which means your monthly LTD benefit would be reduced dollar for dollar for K-1 income received while disabled. This offset can easily reduce your monthly benefit to the policy minimum, which can be as low as $50!
So what should an owner, partner, or shareholder do? Here are four suggestions:
1. Consider your company’s physician group LTD plan to be as important to you as your individual income protection coverage. Work only with brokers who understand the difference between Specialized Physician Group LTD and Traditional Group LTD so Doctors’ needs are met, not just the staff’s.
2. Obtain a sample copy of the group LTD policy before your purchase coverage; make sure you know how your K-1 income will be accounted for.
3. Select the LTD policy most favorable in regard to K-1 income. Consider it part of your covered earnings, not part of the income test qualification, and not a direct or indirect offset when determining your benefit.
4. Don’t assume the Group LTD carrier will be more generous at claim time than what is stated in writing in the policy.