How Workers' Comp Affects Your Social Security Payments

Many Social Security disability applicants file for benefits after they've been injured on the job and may be entitled to, or are already receiving, workers' compensation. In such scenarios, one of the most common questions disability lawyers hear is "Does workers' comp affect SSDI benefits?" Employees filing for workers' comp may also be concerned about how receiving a settlement can affect their Social Security retirement benefits.

Generally speaking, you can receive both workers' compensation and SSDI or retirement benefits at the same time. However, either your Social Security or your workers' comp payments are likely going to be "offset" so that you can't receive your full entitlement to both benefits at the same time. Knowing how to minimize the offset amount can save you a lot of money in the long run.

How Much Is the Workers' Compensation Social Security Disability Offset?

The total amount of your monthly SSDI benefits and workers' compensation cannot be more than 80% of your "average current earnings" before you became disabled. Any excess amount will be deducted, or offset, from your SSDI payments. 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 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.

Sample Social Security Workers' Compensation Offset Calculator

The exact method of determining your worker's comp offset and how much you'll receive in SSDI benefits as a result can be complex. With that in mind, here's a basic example that can give you some insight on how to calculate your offset and benefit amounts:

If you're not sure about your calculations or you have a complicated work history that makes figuring out your average current earnings difficult, Social Security recommends that you reach out to the agency to determine what your average earnings are and what your potential offset would be. You can use Social Security's field office locator to find contact information for an office near you.

Does Workers' Comp Affect Social Security Retirement Benefits?

The workers' compensation offset doesn't 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. Keep in mind that retiring early will provide you with a lower monthly Social Security payment (see our 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.

How You Can Minimize the Workers' Comp Offset Amount

Social Security's rules regarding workers' compensation allows you several 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..

Spreading Out a Lump-Sum Payment

If you've received a lump-sum settlement from workers' compensation, you can reduce the SSDI offset by making sure that the settlement agreement states that the lump sum will be spread out over the rest of your life. Often this method greatly decreases the offset or even eliminates it entirely. Here's an example:

In order to have Social Security consider a worker's compensation lump sum as monthly payments, your settlement agreement must include an "amortization provision." The amortization provision must be included in the original settlement documents—you can't add to an existing settlement without raising red flags.

Because some federal circuit courts have ruled that a workers' comp settlement can't be amortized over your entire life (including retirement) but must be limited to your working years, many attorneys draft the settlement documents to pro-rate the lump sum until you reach full retirement age. Others use annuities for workers' compensation settlements. In this case, since the settlement language doesn't provide for the option to take a lump sum, Social Security will use the monthly annuity benefit to compute the workers' comp offset.

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.

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.

Consider Hiring a Disability Attorney

Social Security's rules regarding the workers' comp offset can be highly complex and aren't always applied uniformly from one office to the next. If you were injured at work or have a work-related illness that makes you eligible for both SSDI and workers' compensation, an experienced disability attorney could save you thousands of dollars by helping you minimize or eliminate the offset. Many disability lawyers offer free consultations, so don't hesitate to ask around to find the right attorney for your case.