Pension Option Form -- How to Cut through the Confusion

Before the Department of Labor and Industries closes your claim to put you on a pension, it sends you a Pension Option form. The form is confusing and misleading because L&I does not "show its math." Here is some information that will help you better understand your options.

The L&I Pension Option form gets confusing when you are married and when the Department has previously awarded a permanent partial disability (PPD) award before deciding you deserve a pension.

The L&I Pension Option form sets out how much L&I will pay you each month, depending on two variables:

  1. How you choose to pay back the prior PPD award; and
  2. Whether you elect to take the full pension payment during your life; or take a reduced pension payment during your life, so if your spouse outlives you, L&I will pay him or her a survivor's benefit for the remainder of his or her life. In a way, this is similar to buying life insurance for your spouse's benefit.

The first variable is, how do you want to pay back the PPD award? There are two ways to do it, a "Choice A" and a "Choice B." Choice A is, L&I reduces the pension payment each month by 25% and uses that money to pay back the prior PPD award. Once the PPD is totally paid back, the monthly pension goes back up (i.e., there is no more PPD reduction). Choice B is, L&I reduces the pension each month by a set amount (which is less than 25%), but the reduction goes on forever. If you live a normal life span, you save a bit of money up front, but you lose a lot more in the long run.

For example, assume L&I paid you a PPD award of $10,000 several years ago. Assume it was never repaid, and now you need to pay it back (you cannot get a pension and a PPD award on the same claim -- you get one or the other, not both). Further assume your full monthly pension amount is $4,000.

Under Choice A, L&I reduces the full monthly benefit by 25%. The math is easy -- under Choice A, your monthly pension benefit will go down 25%, which is $1,000 so you will get $3,000 per month instead of $4,000 per month. L&I will recoup the $10,000 PPD award in 10 months. At that point, the monthly benefit goes back up to $4,000 and stays there for the rest of your life. Actually, the pension will periodically increase with cost of living increases. To sum up, Choice A is a $1,000 temporary reduction that lasts 10 months.

Under Choice B, L&I will reduce the full pension amount by some figure that is less than $1,000 per month, but the reduction is PERMANENT. If you live a normal life span, the permanent reduction will cost you a small fortune over time. To sum up, Choice B is a smaller reduction that lasts forever.

And here is the problem with the Pension Option form: L&I does not explain this to you. Using our example above, L&I will tell you that Choice A will pay you $3,000 per month, but it won't tell you that the reduction is temporary, for just 10 months, at which time your pension amount will go up to its full $4,000 per month. It will be easy for you to think it will last much longer, maybe forever. Then, L&I will portray Choice B as an option that costs you a lot less per month, but won't tell you that if you live a normal lifespan, you will get a lot less than you would under Choice A.

Be careful. Be very careful. And please be sure to do the math.

See our separate blog post about other pension option issues that can arise if you are married.