How Does a Lump Sum Workers Comp Settlement Affect Social Security Disability or Long-Term Disability Benefits?
Workers Compensation Settlements, Social Security Disability Insurance (SSDI), and the Offset: A Guide to Reducing the Reduction in SSDI or Long-Term Disability Payments after Settling a Workers Comp Case
Work-related injuries and occupational diseases often cause permanent physical disability and loss of use of the affected body part.
In addition, the resulting physical limitations and the stress of pretrial discovery and litigation can result in mental health conditions, such as post-traumatic stress disorder (PTSD), depression, and anxiety.
The combined effects of these occupational injuries and illnesses make it challenging to return to the labor market.
Workers compensation benefits such as wage loss payments and lifetime medical treatment help ease the financial burden but are often temporary and insufficient for catastrophic injuries that diminish your ability to earn a living.
For example, most injured employees in Virginia cannot receive more than 500 weeks of income replacement benefits unless the work accident causes significant permanent impairment to two or more extremities (arms or legs).
And wage loss payments are limited to two-thirds of your pre-injury average weekly wage (or less if you are a high-wage earner).
These factors are significant reasons why it makes sense for injured employees to negotiate a workers comp settlement after reaching maximum medical improvement (MMI) for the work injury or undergoing a functional capacity evaluation.
Generally, you can use the lump sum settlement for any purpose:
- Starting fresh after a work accident
- Paying off debt
- Going to school
- Starting a business
- Covering living expenses
But whether you have finalized a workers comp settlement or are considering accepting the insurance company’s offer, you probably realize the amount will not be enough to provide for you and your family for the rest of your lifetime. And you will need to find other sources of income.
For many of you, the best solution is to submit a claim for seeking long-term disability insurance payments or apply for Social Security disability benefits after a workers comp settlement.
But you must be aware of Section 224 of the Social Security Act when drafting the workers comp settlement contracts.
This federal law contains an offset provision governing the SSDI program. And failing to recognize or address it could cost you tens of thousands of dollars in Social Security disability payments (or more).
I wrote this article to explain how to protect your eligibility for disability after a workers comp settlement.
You can minimize or even eliminate the Social Security offset for workers compensation by including the appropriate language in your settlement papers.
And in my experience, long-term disability carriers will abide by the Social Security offset and proration language in the contracts settling your work injury claim, helping you get more after settlement.
Keep reading to learn more.
And call our firm if you want a consultation with one of Virginia’s best disability lawyers: (804) 251-1620 or (757) 810-5614.
We help injured workers win and maximize compensation and disability benefits. And we are ready to pursue your disability claim.
Can I Apply for and Receive Social Security Disability Insurance Benefits After Settling My Workers Comp Case?
Yes.
Workers injured on the job or diagnosed with an occupational illness may qualify for Social Security disability insurance benefits in addition to payments received under federal law (such as the Longshore Act, FELA, or FECA) or state workers comp programs.
But the Social Security Administration (SSA) may offset (reduce) your disability insurance benefits by the amount of your periodic workers comp payments or lump sum settlement unless you address the Social Security offset in the settlement documents.
How Many Social Security Disability Insurance Beneficiaries Received Workers Compensation or Have Pending Claims?
Recent data on the number of people receiving SSDI and workers compensation is hard to find.
But older statistics are available.
A Social Security Bulletin found that 17 percent (or about 1.3 million) of the 7.6 million beneficiaries receiving SSDI benefits in December 2003 had some connection to workers compensation or public disability benefits.
Of the smaller group of 1.3 million SSDI beneficiaries, about three-fourths (75 percent) had a connection to workers comp instead of public disability benefits.
That connection included persons who –
- Continue receiving workers compensation payments,
- Had received workers comp benefits in the past, or
- Had received a lump sum settlement instead of periodic benefits
The jurisdictions with the highest percentage of disabled workers connected to workers compensation were California, Puerto Rico, Rhode Island, and West Virginia.
Regardless of the exact numbers, the empirical evidence shows that many individuals receive Social Security disability insurance payments despite a past or ongoing workers comp claim.
What is an Offset?
An offset is a payment or claim that diminishes or balances something (such as a different claim).
In workers comp and Social Security disability law, the offset is the reduction in your Social Security disability insurance benefits because the total benefits payable under the SSDI and workers comp programs exceed the limits the Social Security Act allows.
What is the Social Security Act’s Offset Provision?
Section 224 of the Social Security Act (42 USC 424) limits your combined SSDI benefits and state workers compensation payments.
Under the statute, your combined Social Security disability insurance benefit and periodic workers comp payment (or lump sum settlement) cannot exceed 80 percent of your pre-disability average current earnings (ACE).
Otherwise, Section 224 requires a reduction in your SSDI payment until the total equals 80 percent of your ACE amount.
Fortunately, you can minimize or eliminate the Social Security disability offset with specific language in your settlement papers.
And therefore, you (or your attorney) must be familiar with the Social Security offset for workers compensation and ways to avoid it.
What is the Social Security Offset’s Purpose?
In the 1970s, a claimant receiving workers compensation benefits and SSDI payments challenged the constitutionality of the offset provision, arguing that the reduction of benefits deprived him of due process.
Unfortunately, the U.S. Supreme Court held the statute constitutional.
It found that Congress had a legitimate purpose in enacting the Social Security offset: to prevent the duplication of income benefits for injured workers.
In addition, Social Security disability insurance payments supplement workers comp benefits when the state payments are inadequate and do not cover basic needs.
Who Does the Social Security Disability Offset Affect?
The Social Security offset can affect any injured worker who received or continues to receive an indemnity payment under workers comp.
However, generally, the offset hurts low-income workers more often than high-wage earners, especially if you were making the most you have ever made at the time of the work injury.
The math provides the reason for this disparate impact.
Persons with lower pre-disability earnings have a lower ACE amount.
And the lower your ACE amount, the more likely it is that the combined total of your workers comp periodic payments and SSDI benefit will hit the 80 percent threshold, triggering an offset.
How Does the SSA Calculate the Offset?
Three numbers determine whether your workers comp payments will reduce your SSDI benefit:
- Your monthly workers compensation benefit amount (TTD, TPD, or PPD)
- Your monthly SSDI benefit amount
- Your average current earnings (ACE) – You can learn more about the SSA’s three computation methods for this figure here. Often, your ACE differs from your pre-injury average weekly wage under workers comp because the administrative agencies use different definitions and formulas.
Your monthly workers compensation benefit amount + your monthly SSDI benefits payment must equal or be less than 80 percent of your ACE. Otherwise, the SSA will reduce your SSDI payment until you meet the threshold.
How Long Does the Social Security Disability Offset Last?
The offset stops when one of these things happens:
- The SSA finds you are no longer disabled under its rules. Though less of a risk for disabled workers over 50 years of age (because it is easier to qualify for SSDI when 50 or older), it is possible for workers comp to find you disabled when the SSA does not. For example, a younger warehouse worker for Amazon who suffers a torn rotator cuff or back injury can receive workers comp if restricted to sedentary work but not SSDI under the Medical-Vocational Guidelines (the “Grid Rules”).
- Your periodic workers comp benefits end. For example, the employer may stop workers comp payments by proving that your disability is unrelated to the work accident.
- You reach full retirement age and begin receiving regular Social Security retirement benefits.
- You choose to receive reduced retirement insurance benefits.
- The lump sum proration ends.
- The worker dies.
How Can I Minimize the Social Security Disability Offset? Prorating the Lump Sum Settlement
Carefully wording the workers comp settlement documents can minimize or eliminate the Social Security disability offset.
You have two strategies to reduce the offset through the settlement papers –
- Excluding specific expenses
- Spreading the payments over a more extended period
Excluding Expenses
Specific, documented medical and legal expenses are excludable from the offset, netting more money for you.
These excludable expenses include:
- Litigation costs (deposition transcripts, medical records, etc.)
- Medical expenses incurred
Therefore, the first step in reducing the Social Security offset is to state how much of the lump sum settlement you are allocating to each item.
Prorating the Workers Comp Settlement Over a Longer Period
The second step in reducing the Social Security offset is including contractual language spreading the lump sum over an extended period.
This provision is called Social Security proration language.
You can use proration language to minimize the effect of any lump sum on your SSDI benefits.
But remember, for proration consideration, the SSA defines a lump sum as “a final settlement, award, compromise and release, or other approved agreement that represents a final WC/PDB payment due to the [beneficiary].” Therefore, a lump sum check representing past-due period workers comp payments that brings you up to date is not a lump sum settlement for Social Security proration purposes.
Your life expectancy or work-life expectancy (the time until you retire) are the most common periods chosen to minimize the offset.
You can review my sample Social Security disability offset language for workers comp settlements here.
Stating the Weekly Rate
The settlement papers should detail the expenses excluded and the method used to spread the lump sum over time, then state the weekly compensation rate that Social Security should use to determine any offset.
Is My Workers Comp Settlement Still Paid as a Lump Sum if the Contract Includes Proration Language to Reduce the Offset?
Yes.
The proration language is an accounting fiction.
The insurer will still pay a lump sum if that is the agreement.
What Happens if the SSA Rejects My Offset Calculation?
We recommend including a paragraph in the settlement papers that reserves your right to offer alternate offset calculation methods favorable to you if the SSA rejects your initial language.
What Happens if the Workers Comp Settlement Documents Did Not Include Language Minimizing the Social Security Offset?
Unfortunately, you are probably out of luck if your approved settlement contracts did not include language about excludable expenses or spreading the payment over time.
The SSA can use any rate that “will approximate as nearly as practicable” the periodic workers comp benefit amount if the original settlement contract does not specify a future weekly rate.
And there is a significant risk the SSA will use your temporary total disability amount (pre-settlement) as the future weekly rate.
If it does, you might be stuck with a weekly rate much higher than the one you could have used if the parties had drafted the settlement documents properly.
The law suggests you cannot amend the settlement order to lower the rate.
Can I Get Long-Term Disability Benefits if I Settle My Workers Comp Case?
Yes, you can get long-term disability benefits after settling your work injury case, so long as you meet the insurance plan’s other requirements.
But similar to SSDI, the long-term disability insurance plan may include an offset that reduces your monthly payment based on your workers compensation settlement.
You can find out by reviewing the insurance policy and related documents.
Fortunately, in my experience, long-term disability carriers will follow the SSD proration language in the settlement papers if you include a statement that any Social Security offset language also applies to long-term disability policies.
Further, the long-term insurance policy may exclude additional items from the offset, such as compensation for permanent loss of use of the injured body parts.
Will I Have to Pay Back My Workers Compensation Settlement if I Start Receiving Social Security Disability Insurance Benefits?
No.
You do not have to pay back a lump settlement (in whole or part) if you later qualify for SSDI benefits.
What Payments are Not Subject to the Social Security Offset?
This article focuses on the Social Security offset from state workers compensation benefits.
But some of you might receive similar benefits through other programs.
Many of these benefits are not subject to the offset, such as:
- Payments made under the Federal Employers Liability Act (FELA) for injured railroad workers
- Jones Act benefits
- Company or private disability plan benefits
We Provide High-Quality Legal Representation to Injured Workers Seeking Social Security Disability Insurance Benefits
If you are a disabled worker wanting to resolve your work injury claim by settlement or get SSDI benefits, call us or fill out our online contact form.
You do not have to take on the Social Security Administration, an insurer, or its claim administrator (such as Sedgwick CMS) alone.
We are ready to go to work for you.
You can use our experience and knowledge of the laws to settle your workers comp case in a manner that puts more money in your pocket if you qualify for SSDI.
And remember – you pay nothing unless we help you recover compensation.
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