Blue Ridge ESOP Associates Industry News

Disability in an ESOP

Posted by Kim M. Thompson

Dec 22, 2021 10:03:58 AM

bronze-medicine-symbolWhen an employee terminates employment with the company due to a disability, his or her ESOP account may be subject to certain procedures and additional benefits. Before these procedures and benefits can be applied, it is important to understand how your ESOP Plan Document defines disability and whether or not the employee’s circumstance meets that definition.

How is Disability Defined?

Your ESOP Plan Document should clearly define the term “disability” and outline how to determine whether an employee has met the definition or not. Here are a few common definitions and sample language that ESOPs use:

1) Social Security Definition: “Total and permanent disability” shall mean the mental or physical inability of the participant to engage in any substantial gainful activity, as defined under Title II or Title XVI of the Social Security Act, and which can be expected to result in death or to last for a continuous period of not less than 12 months.”

2) The individual is covered by the Employer’s disability insurance plan and is determined to be disabled under such plan.

3) Physician Determination Definition: “Disability means a mental or physical condition which, in the opinion of a licensed physician selected by the Plan Administrator, renders a participant incapable of performing the duties assigned to him by the employer for a continuous period of time.

4) Plan Administrator or Committee Determination Definition: “Disability means the Plan Administrator or ESOP Committee determines in a uniform or nondiscriminatory manner that a participant is incapable of performing the duties assigned to him due to a mental or physical impairment for a continuous period of time. The Plan Administrator shall have the right to have a participant examined by a qualified physician of the Plan Administrator’s choosing.”

When a determination is made by the Plan Administrator or Committee, Department of Labor rules that became effective on April 1, 2018 strengthened and expanded rules governing claims and appeals of disability determinations. In these cases, the Plan Administrator or Committee may want to review its procedures, Plan claims language and communications for compliance with the rules. If the finding of disability is made by a party other that the ESOP Plan Administrator (such as the Social Security Administration or the Employer’s long term disability plan), the ESOP is not subject to these rules.

How does Disability Impact an ESOP Participant?

If your participant meets the definition of disability, your Plan Document may also include additional procedures and benefits. Look for the following provisions outlined in your document:

    • The participant may become 100% vested in his ESOP account.
    • The participant may have different conditions to meet in order to be eligible for a contribution allocation for the year in which they become disabled. For example, regular termination may require a participant to be credited with at least 1,000 hours of service during the year and/or be employed on the last day of the plan year. Your Plan Document may revise or remove this criteria for disabled participants.
    • The participant may be subject to different methods of and/or timing requirements for distribution* of his or her vested ESOP account balance.
      *Any distribution that is made to a disabled participant (as defined by the IRS) will also be subject to different tax rules.

Coordinating Definition Among All Plans.

If you sponsor multiple plans that require a determination of disability you may want to review each plan to determine if the definitions are consistent. No one wants to tell a participant that they meet the definition of disability under one plan but not under another plan. 

Experience the Leader in Personalized ESOP & 401(k) Administration

Blue Ridge ESOP Associates can provide everything you need to administer your ESOP, 401(k) or combination ESOP/401(k) plan. Our full service outsourcing, which can include participant on-line services, provides worry-free  assistance for your HR or Benefits staff, leaving them free to concentrate on other responsibilities.

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