Judges Clash on Disability Income Calculations

In 2005, Fortier became medically disabled and closed his practice. He began collecting $15,470 per month in benefits through his individual disability policy.

He also applied for group disability benefits. "The policies provide that an insured who is disabled is entitled to receive 60% of his predisability earnings, capped at $1,500 per week for his short-term benefits and $6,000 per month for long-term benefits," Niemeyer says. "Those benefits, however, are reduced by the amount that all disability benefits (from both individual and group policies) exceed his predisability earnings."

Principal Life agreed that Fortier was disabled, but it subtracted the practice startup expenses from his predisability income and calculated that his predisability earnings were $9,916, Niemeyer says.

Fortier argued that his predisability earnings were much higher than $9,916.

Fortier contended that, if the extraordinary one-time business expenses incurred in 2003 and 2004, his predisability earnings were high enough to entitle him to the maximum disability benefits from the group policies.

Fortier included 2003 and 2004 startup expenses in his income tax returns.

Principal Life told Fortier that, according to the Internal Revenue, a business expense that is deductible must be "ordinary and necessary." Because Fortier deducted the practice startup expenses in 2003 and 2004, he classified the expenses as ordinary expenses, rather than as extraordinary expenses, the company said.

A U.S. District Court in Raleigh, N.C., ruled in favor of Principal.

Fortier is arguing that the Principal Life group disability plan administrator abused her discretion when she decided that his predisability income was simply the net income from his federal tax returns for the two years prior to his disability.

Fortier says the policy includes specific criteria for the deduction of business expenses from predisability income, including criteria the administrator did not take into account.

But Niemeyer and another judge on the panel, J. Harvie Wilkinson III, say they believe the plan administrator could have reasonably read the short-term and long-term policies to indicate that she could simply use the income reported on federal income tax returns to calculate the insured's predisability income.

The policy language includes extra provisions, the two judges say.

"With the various phrases thus being subject to amorphous tests to resolve their multiple meanings, we cannot conclude that Principal Life's take on the policy was an unreasonable one," the judges say. "Because the policy entrusts Principal Life with 'complete discretion' to resolve ambiguities and to determine benefits, we will respect its reasonable interpretation of the language when calculating Fortier's predisability earnings."

Judge Henry Floyd writes in a dissent that, although an ERISA group disability plan administrator may have discretion, that discretion never includes the ability to "read out" an unambiguous provision contained in an ERISA plan.

Part of Fortier's long-term disability plan gave 5 tests an expense had to meet before it would be deducted from the disability plan member's predisability earnings, Floyd says.

Whether the expense was deductible was just one of the 5 tests, Floyd says.

Principal Life's reading of the policy seems to incorporate the Internal Revenue Code in the policy by reference, Floyd says.

Floyd says he believes the policy language requires Principal Life to take Fortier's gross income, then subtract only business expenses incurred on a regular basis.

"Nor am I convinced that…Fortier should have known that what the policies plainly meant was that anything he deducted on his tax returns would be deducted from his gross predisability income, and would, thus, ultimately reduce his disability benefits," Floyd says.

The goals of ERISA policies and the Internal Revenue Code are different, and it is proper for Fortier to want the practice startup expenses treated differently by Principal Life than the Internal Revenue Service treats them, Floyd says.