When someone has been injured at or developed an illness due to work and can’t return to their job, they are entitled to workers’ compensation benefits. If sustained injuries are severe enough to prevent the victim from working again in any capacity, they may also qualify for Social Security Disability Insurance (SSDI) benefits. However, the Social Security Administration (SSA) does not allow people entitled to both benefits to collect the full amount from each program simultaneously. A lump sum workers’ compensation settlement can further affect these benefits, potentially reducing SSDI payments and even impacting future Social Security retirement income. Understanding how these payments interact from the very beginning is essential for making informed financial decisions.
The Workers’ Compensation Offset and SSDI
Many times, workers’ compensation claimants settle their cases before they reach a hearing or trial. Rather than continuing to receive ongoing payments, they may agree to a settlement, either as an immediate lump sum or through a structured payment plan. In either case, they give up their entitlement to future monthly workers’ compensation benefits. It’s important to note that these settlements differ from lump sum payments issued for past-due benefits, which are simply catch-up payments for amounts already owed.
Whether you receive a lump sum settlement or ongoing workers’ compensation payments, the SSA may need to apply a workers’ compensation offset. This occurs because the law states that the combination of both benefits cannot be more than 80% of the worker’s average weekly wage before the accident.
“This reduction is called the ‘offset,’” said Christopher J. Grover, attorney, Jeffrey Freedman Attorneys, PLLC. “Offsets between workers’ comp and SSDI get complicated and can change month-to-month because the workers’ comp payments can be increased or decreased on a monthly basis.”
Suppose a person is receiving regular monthly workers’ compensation payments. In that case, the SSDI offset can change from month to month depending on fluctuations in the workers’ comp amount. Ongoing workers’ compensation benefits are considered live payments, so they can change based on real-time factors like medical re-evaluations or a switch from temporary to permanent disability. In contrast, if a person receives a lump sum settlement, the SSA typically spreads that amount out—or “prorates” it—over a set period, resulting in a consistent monthly reduction to SSDI.
The SSA is aware that eligible SSDI recipients will likely take the workers’ compensation lump sum settlements and will offset SSDI payments accordingly. In many cases, injured workers receive periodic weekly or bi-weekly workers’ compensation payments before agreeing to a lump sum payment. To calculate the offset, the SSA typically converts the total settlement into a monthly equivalent. This is done by dividing the lump sum by the amount and frequency of the periodic payments the individual had been receiving, then applying the offset to SSDI payments for the corresponding number of months. Individuals can use a Social Security workers’ compensation offset calculator to estimate how their SSDI benefits might be affected by a lump sum payment.
Do I Have to Report My Settlement to SSDI?
Yes. Failing to report a workers’ compensation settlement to the SSA can result in overpayment, which the recipient may have to repay later. The SSA uses specific formulas to determine how much of the lump sum will offset SSDI benefits, which is why full disclosure is essential to avoid financial surprises.
Minimizing the Impact of a Workers’ Compensation Settlement
In determining offsets, the SSA will look closely at the specific language of the workers’ compensation settlement agreement. As a result, attorneys try to draft settlement agreements that minimize potential SSDI benefit offsets. For example, experienced lawyers will specifically exclude medical and legal expenses from the total lump sum so that the SSA cannot consider those items part of the total settlement amount.
If the language is not clear, however, the SSA will likely ask for immediate documentation of the medical and legal expenses associated with the settlement. The rules about which items have to be written specifically into the settlement agreement are determined by state law, not federal law; therefore, settlement agreements vary widely from state to state. In New York, settlements are subject to approval by the Workers’ Compensation Board, and deductions for legal and medical costs must be clearly documented to be excluded from the offset calculation.
Claimants can also reduce potential offsets by stating explicitly that the lump sum is meant to be spread out over the rest of the individual’s life rather than being collected all at once. At best, this method eliminates the offset. At worst, it will likely decrease the offset by quite a bit. This method, called an amortization provision, must be included in the original settlement agreement. Any attempt to add this provision to an agreement later is prohibited. The SSA will view this type of action as a blatant attempt to circumvent the offset.
Please note that if you are unable to settle with the insurance company or your employer, a judge’s decision at trial will not allow for a lifetime amortization to maximize your benefits, and the lump sum will be subject to offsets.
How Does a Lump Sum Settlement Affect Social Security Retirement?
Generally, once a person reaches full retirement age, SSDI benefits convert to standard Social Security retirement benefits. When this happens, the workers’ compensation offset no longer applies. However, if an individual receives a lump sum settlement that reduces their SSDI payments before reaching retirement age, their overall Social Security earnings record may be affected, which could potentially result in lower retirement benefits.
When to Contact a Lawyer
If you are worried the SSA will reduce your SSDI benefits because of a lump sum workers’ compensation settlement, contact Jeffrey Freedman Attorneys so that your workers’ compensation case can be resolved in a way that leaves you with the maximum benefit amount each month. “To get the most out of both benefits programs, it’s critical to have an attorney who understands both systems look over your situation,” Grover said.