Minimize How Much Workers' Compensation Will Lower Social Security Payments

If you receive Social Security benefits and workers' comp benefits at the same time, one or the other may be reduced (offset) unless you plan for it.

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In many states, an individual's Social Security Disability Insurance (SSDI) benefits will be reduced if he or she is also receiving workers' compensation. This offset applies only when the individual's combined monthly amounts of SSDI and workers' compensation are greater than 80% of individual's pre-disability "average current earnings." In a minority of states, the offset process works in reverse: workers' compensation benefits may be reduced if an individual collects SSDI.

Calculating Average Current Earnings

Social Security figures your average current earnings in one of three ways:

  • The Average Monthly Wage Formula: Social Security uses your average monthly wages to calculate your disability benefit amount.
  • The High-Five Formula: Social Security uses the average monthly wages from your five highest-paid consecutive calendar years.
  • The High-One Formula: Social Security uses the average monthly wages from the your single highest-paid calendar year during the previous five years.

The High-One formula is used in the vast majority of cases, although Social Security will use whichever method is most favorable to you. However your average earnings are calculated, if your SSDI monthly benefit and your monthly workers' compensation benefit combined are higher than 80% of your average current earnings, the offset will apply.

Minimizing the Offset Amount

Social Security's rules regarding the workers' compensation offset allow for various opportunities to minimize the amount of payments subject to the offset. Here are a few of the most common ways to maximize the amount of benefits you can keep.

Exclusions for Certain Expenses

Before calculating your gross workers' compensation settlement amount, Social Security deducts legal fees, dependent payments, and rehabilitation costs. Past or future medical expenses are also excluded, with the exception of payments made by Medicare. Social Security will require documentation of any expenses you wish to deduct from your workers' comp settlement, so maintain these records carefully.

If you're covered by Medicare and you set aside an unreasonably large amount of your workers' compensation settlement for future medical expenses (using what's called a Medicare Set-Aside), Medicare may be unwilling to pay benefits until you've exhausted those funds.

Spreading Out a Lump-Sum Payment

When a person receives a lump-sum settlement from workers' compensation, an effective strategy for reducing the Social Security offset is to state in the settlement agreement that the lump sum is meant to be spread out over the rest of the individual's life. Often this method greatly decreases the offset or even eliminates it entirely.

Example: If a 45-year-old individual receives a lump sum of $18,000 from workers' compensation, and actuarial tables indicate that he has a life expectancy of 40 more years (or 480 months), Social Security will divide the lump-sum amount by 480 months in figuring the monthly offset. Thus, the individual will be considered to be collecting $375 per month in workers' compensation ($18,000 ÷ 480 months = $375 per month), despite actually receiving the benefits as one lump sum.

If the individual also receives $1,225 in Social Security, for a total of $1,600 per month, his benefits will not be offset unless his average current earnings (discussed above) were under $2,000 per month ($1,600/$2,000 = 80%).

To be eligible to have Social Security consider a lump sum as monthly payments, your worker's compensation settlement agreement must include an "amortization provision." Note that the amortization provision must be included in the original settlement documents. Adding the term to an existing settlement is prohibited and will raise red flags with Social Security; it will be seen as an attempt to circumvent the offset.

At least one federal circuit has ruled that a workers' compensation settlement cannot be spread out over a disability claimant's entire life, but must be limited to the person's working life. To avoid this, many lawyers draft the settlement documents to indicate that the settlement is pro-rated until the claimant reaches full retirement age. Other attorneys have chosen to use annuities in workers' compensation settlements. In this case, because the settlement doesn't provide for an option to take a lump sum, Social Security will use the monthly annuity benefit to compute the workers' compensation offset.

A lump-sum settlement should not be confused with a lump-sum payment of past-due worker's comp benefits. Under a settlement agreement, the worker's comp claimant releases the insurance carrier or employer from liability for future monthly benefit payments and future medical expenses in exchange for a cash settlement, usually in the form of a lump sum.

If you're unable to settle with the insurance company and you proceed to trial, the judge's decision will not provide for lifetime amortization to maximize your benefits. You'll be stuck with the permanent disability rate listed in the award and you won't be able to minimize a Social Security offset this way.

Shifting to Social Security Retirement Benefits

The workers' compensation offset does not apply if you're receiving Social Security retirement benefits. Disability recipients who are approaching age 62 should explore the possibility of filing for early retirement to avoid the workers' compensation offset. Of course, retiring early will provide you with a lower monthly Social Security payment (read Nolo's article on applying for Social Security disability after age 60), so consult an attorney or your local Social Security office to see whether early retirement is worth it.

Consider a Disability Attorney

Social Security's rules regarding the workers' compensation offset can be highly complex and are not applied uniformly from one office to the next. If you were injured at work or have a work-related illness and you're eligible for SSDI benefits and workers' compensation, an experienced disability attorney could save you thousands of dollars by helping you minimize or eliminate the offset.

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