Mussack: How to Apply COLA to Lifetime Benefits
Thursday, January 14, 2021 | 159 | 0 | min read
With the arrival of the new year, it’s time to bust out our calculators and prepare and update cost-of-living adjustments.
As of Jan. 1, all continuing permanent total and life pension benefits (70% PD or greater) for date of injuries of Jan. 1, 2003, and later should be increased based on COLA application found in Labor Code 4659.
For 2021, the COLA percentage increase is 0.043774, according to the Department of Industrial Resources.
It’s important to note that you should apply the COLA adjustment to the current benefit rate BEFORE any reduction.
Let’s look at an example. Let’s assume that the current life pension rate for a 2020 claim is $124 per week. With a $25.58 weekly uniform reduction, the current weekly benefit is $98.42. How and where would we apply the COLA adjustment using this set of facts?
- Multiply $124 by 1.043774 = $129.43.
- The updated rate, before reduction, is $129.43.
- The uniform reduction ($25.58 in this example) is subtracted from the updated rate before reduction.
- The updated weekly benefit beginning Jan. 1, 2021: $129.43 minus $25.58 = $103.85.
Here are some additional helpful hints that will guide you to the most accurate calculations possible:
- Check your award and associated paperwork, including any commutation worksheets from the Disability Evaluation Unit. The commutation worksheets should identify any reduction from the award. That calculation may or may not be written into the stipulation/award.
- Reductions would apply only with a commutation from future benefits, such as for attorney fees.
- Consider review of any prior COLA and benefit rate adjustments for correct application.
For more information about uniform reduction and uniform increasing reduction, continue reading. Don’t miss Bradford & Barthel's one-hour webinar on commutations (CE credits are available).
Commutations and resulting reductions
What would create a uniform reduction in a weekly lifetime benefit? Well, a commutation of attorney fees for lifetime benefits (life pension or permanent total disability) would result in a uniform reduction in the weekly benefit.
There are two types of uniform reduction: standard uniform reduction and uniform increasing reduction.
The DEU may calculate both methods when doing commutation calculations, with the choice of which to use left to the involved parties.
For a standard uniform reduction, the amount of the weekly reduction is fixed for the duration of the lifetime benefit.
This is currently the usual method of applying uniform reduction. With this type of reduction, we still apply the COLA increase every Jan. 1 to the benefit rate before reduction. The amount of the reduction itself remains constant for the duration of the benefits.
What impact does this have? A larger portion of the initial benefit to the injured worker is reduced. That benefit increases more rapidly than with an increasing reduction.
Over the last eight years, COLA has ranged from 0.7429% (2014) to 4.3774% (2021).
Uniform increasing reductions
For a uniform increasing reduction, the weekly reduction starts at a lower amount and increases annually by a fixed amount. The amount of increase would be addressed in the award, based on the commutation calculation. Currently, that increase might be fixed at 3% annually.
With a uniform increasing reduction, one should always first apply COLA to the rate before making any reductions. One also should make any adjustments to the weekly reduction, which is usually a fixed percent as established within the award.
The uniform increasing reduction method is far less common now but had been used more frequently on awards prior to 2014.
COLA is applied every Jan. 1 to the benefit rate before reduction, while the reduction increasing by a fixed amount, currently 3%, is standard, for the duration of the benefits.
The reduction of the initial benefit to the injured worker is less than with uniform reduction, as that benefit to the injured worker increases more slowly than with an increasing reduction. Regardless of COLA, the reduction increases by a fixed rate.
Tim Mussack is a senior AMA analysis and rating specialist in Bradford & Barthel's Sacramento office. This entry from Bradford & Barthel's blog appears with permission.