How Much of My Workers' Comp Settlement Amount Do I Get to Keep

If you have a workers' comp claim because of an on-the-job injury or work-related illness, you may have to go through appeals, settlement negotiations, and a lot of time before you finally resolve your case. Once you get an award of benefits or a settlement with the insurance company, others—including your lawyer, doctors, and government agencies—may have a claim on some of the money. So that you aren't surprised when that happens, it helps to understand what will be deducted from your settlement or award—and how much you'll get to keep.

Workers' Comp Attorneys' Fees and Costs

In most states, workers' comp attorneys charge what's known as a "contingency fee." That means that your attorney receives a certain percentage of the money you get in an award or settlement—and isn't paid at all if you don't win any benefits. Many states set a limit on the percentage as well as the total amount of workers' comp attorneys' fees. Typically, a judge must approve the fees. (To learn more, see our article on how much lawyers charge in workers' comp cases.)

States may also have guidelines on which parts of the award or settlement count for purposes of calculating the fee. In some states, the lawyer may take a percentage of your total award. Other states allow attorneys' fees only on portions of the award, such as the amount of compensation that was in dispute or unpaid benefits that are owed at the time of the award or settlement.

You'll also have to reimburse any payments your lawyer has advanced for expenses like copying medical records, hiring expert witnesses, and hiring court reporters to transcribe depositions. Typically, lawyers will deduct these costs before attorneys' fees are calculated. For example, suppose you settle your claim for $50,000, your lawyer has already paid $2,000 in costs, and the contingency fee is 20%; the attorney would receive $9,600 in fees (20% of $48,000) plus $2,000 for costs. However, some attorneys calculate their contingency fee based on the total award, before costs. Be sure to check the details in the fee agreement you signed with your lawyer.

Unpaid Medical Bills and Workers' Comp

If your workers' comp claim was denied and you win on appeal, the judge may order the insurance company to pay your medical bills. This will be an extra item in your award. If you paid your own medical bills, you can keep the money in the award that's earmarked for those costs. However, if your doctors agreed to postpone payment until you received a workers' comp award (this is called a "doctor's lien"), the money will go to paying those outstanding bills.

Sometimes, you lawyer may negotiate a settlement that requires the insurance company to paid specific medical bills directly. More often, however, the settlement will simply include a lump sum for medical bills. Your lawyer will usually withhold a portion of the settlement to resolve the unpaid bills—but may be able to negotiate with your medical providers to get those bills lowered. That way, you can keep more of your settlement.

Medicare or Medicaid Set-Aside

Under federal law, Medicare won't pay for medical expenses that are covered under workers' compensation, but it may pay medical bills conditionally when there's a dispute about workers' comp liability. So if you're eligible for Medicare, part of your settlement may go to the government. First, you must repay Medicare for conditional payments it made during your appeal. Second, if your settlement includes any money for future medical expenses (unless the insurance company has agreed to pay all of those expenses directly), you need to make sure that Medicare's financial interests are protected. In most cases, you'll do this by putting part of the settlement funds in a Medicare Set-Aside Account (MSA), which will go to pay for future medical treatment related to your work injury.

There's no law requiring you to get approval from Medicare for the amount in your MSA, but doing so has a big advantage: Medicare will pay any medical expenses for your work injury once you've used up the approved amount in your MSA. Medicare will only review and approve your MSA if:

• you're already a Medicare beneficiary, and your settlement is for more than $25,000; or
• it's reasonable to expect that you'll be eligible for Medicare coverage within 30 months, and the anticipated total settlement amount is more than $250,000.

Even if you don't meet those thresholds (which the government could change), you will still need to set up an MSA except in rare situations where it's clear that Medicare's interests are protected. If you don't set up an MSA, Medicare may decide that your entire settlement was for future medical costs and refuse to pay your medical bills until you prove that you spent all of the settlement money on treatment for your work injury.

When you have an MSA, you must put its funds in a separate, interest-bearing account. You also must follow specific rules about recordkeeping and fund administration. If you use MSA funds for anything other than medical bills related to your work injury, Medicare may refuse to pay for treatment of that injury after the MSA is depleted.

The process of setting up an MSA, getting it approved, and managing the account can be complicated. Any time you're hoping for a settlement that covers future medical treatment, it would be in your best interest to work with an experienced workers' comp lawyer who can guide you through the process, help you set a fair amount for your MSA, and educate you about proper account management.

Similarly, if you have Medicaid, you must reimburse your Medicaid insurer for any conditional payments it made for medical bills related to your work injury. Before you settle your workers' comp claim, you (or your lawyer) should contact your Medicaid insurer to determine how much it paid for your medical treatment.

Permanent Disability Advances and Workers' Comp

In some states, you may receive permanent disability payments before your workers' claim is settled. In California, for example, the insurance company generally must start making permanent disability payments within 14 days of the last payment for temporary disability (Cal. Labor Code § 4650 (2018)). If you receive permanent disability advances, they will be deducted from your ultimate settlement or award.

Workers' Comp Deduction for Unpaid Child Support

If you owe overdue child support, part or all of your workers' comp award or settlement may be taken out to pay what you owe. Some states limit the amount of your settlement that can be taken for unpaid child support. In Maryland, for instance, only 25% of your net proceeds from a workers' comp settlement can go to pay a judgment lien for unpaid child support (Md. Code, Cts. & Jud. Proc. § 11-504(i)(2) (2018)). Also, workers' comp benefits for temporary or permanent disability are generally considered income for purposes of calculating the amount of child support you owe, because those benefits are meant to replace lost wages. Similarly, the custodial parent can collect child support by having a portion of your ongoing weekly disability checks taken out, just like wage garnishment for child-support collection. (Learn more about different methods for child-support collection.)

Taxes and Workers' Comp Benefits

Generally, you don't have to pay state or federal taxes on your workers' compensation settlement or award. The one exception to this rule applies if you're also receiving benefits through Social Security Disability Insurance (SSDI). If your combined workers' comp and SSDI benefits are high enough, your SSDI benefits may be reduced (which is called an "offset"), and you may have to pay taxes on the amount of the offset. For more information on how the offset works, see our article on taxes and workers' compensation.

Your workers' comp settlement or award may also affect whether you qualify for tax credits, because the IRS may consider the amount you receive as income for the purpose of determining your eligibility for those credits.

How a Workers' Compensation Lawyer Can Help

As we've seen, workers' comp settlements and awards can have significant financial and legal consequences, especially in terms of what you might owe for future medical bills. It can be difficult to make sure that you've covered all the bases and accounted for potential problems unless you have the help of a workers' comp lawyer.

An attorney who's experienced in this area can help you negotiate a fair settlement, help you estimate what you'll need for future medical treatment, design the settlement to minimize the workers' comp–SSDI offset, negotiate reductions in what you owe for medical bills and child support, and ensure that the settlement proceeds are distributed properly.