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How Do Lump Sum Settlements Affect Social Security Disability?

How Do Lump Sum Settlements Affect Social Security Disability?

Some workers who are eligible for Social Security Disability Insurance (SSDI) benefits may also be eligible for workers’ compensation benefits if their injury or condition is the result of a work-related accident or illness. Social Security Administration (SSA) does not allow people entitled to both benefits collect the full amount of each simultaneously.

In this situation, SSA generally requires a reduction in SSDI benefits so that the total monthly amount received is not more than 80% of the amount the individual earned when he or she was employed and working.

Many times, claimants for workers’ compensation settle their cases before their claim gets to the hearing or trial stage. They choose to give up their entitlement to monthly workers’ compensation benefits in exchange for an immediate lump sum cash settlement. Keep in mind that this kind of settlement is not the same as a lump sum payment of past-due workers’ compensation benefits.

SSA is aware that eligible SSDI recipients will likely take the workers’ compensation lump sum settlements and will offset SSDI payments to account for doing so. The most common way they do this is by converting the settlement amount into monthly amounts. They divide the lump sum by the periodic workers’ compensation payments the individual had been receiving and then apply the SSDI offset for those number of months.

In determining offsets, SSA will look closely at the specific language of the workers’ compensation settlement agreement. As a result, workers’ compensation attorneys try to draft settlement agreements that will minimize potential SSDI benefit offsets. They will specifically exclude medical and legal expenses from the total lump sum so that SSA cannot consider those items part of the total settlement amount. If the language is not clear, however, SSA can consider the whole amount as eligible for offsets.

If the language of the settlement agreement is not clear, 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.

You 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 entirely; at worst, it will most likely decrease the offset greatly. This method, called an amortization provision, must be included in the original settlement agreement. Adding it later is prohibited, and if you try to do so, it will raise red flags, and SSA will see it 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.

If you are worried that SSA will reduce your SSDI benefits because of a lump sum workers’ compensation settlement, talk to a disability attorney so that your workers’ compensation case can be resolved in a way that leaves you with the maximum payment amount each month.