Consult a Professional Before Making Retirement Plan Disability Determinations

Disability distribution requests are uncommon — but when they show up in your retirement plan, they require action. However, your plan committee may not have the expertise to determine if a participant is considered disabled. By consulting a disability determination professional, you can verify that a participant meets IRS requirements and confidently process the distribution request.

What’s included in a disability determination?

When a participant has a disability, the determination results in several outcomes, including:

1. Triggering a distributable event, allowing the participant to access his or her account balance
2. A full vesting of employer contributions, subject to vesting schedules
3. Potentially allowing the participant to avoid the 10 percent IRS early withdrawal tax penalty

Determining if an individual can be classified as disabled

In general, permanently and totally disabled individuals are those who are unable to engage in any substantial, gainful activity due to physical or mental impairment that is either terminal or expected to be long-term and indefinite.

In order for participants to avoid the 10 percent early withdrawal penalty on their retirement account, they must meet disability requirements. The IRS’s requirements under the tax code provides guidance to consider when making the determination that a participant is permanently and totally disable. Examples of conditions that ordinarily are considered in determining a disability include:

• Loss of two limbs
• Progressive diseases that result in the loss or atrophy of a limb
• Diseases that result in major loss of heart or lung functionality
• Inoperable and progressive cancer
• Brain damage
• Mental disease requiring constant supervision
• Loss of vision, speech, or hearing

These conditions do not guarantee that an individual will be considered disabled, but are used to determine whether the employee can continue to be employed at his or her customary substantial gainful activity or a comparable activity.

Keep personal health information private

Due to the sensitive nature of the information necessary to make a disability determination, your organization should strive to limit the exposure of a participant’s personal health information to only the necessary individuals. Bringing in a professional to review medical information and make the determination is often ideal, as a professional is trained and qualified to review the documentation without needing additional reviewers. The recommendation of the professional can then be used to support the plan sponsor’s decision while still preserving the participant’s privacy.

How we can help

With a little patience and involvement of professionals, disability distributions can be successfully handled, reviewed, and approved. CliftonLarsonAllen (CLA) can help plan sponsors establish sound processes for these distributions and locate qualified disability professionals.

Read more about plan distribution options and responsibilities.