Work Comp Settlements & Social Security

For those who've been injured at work and received a workers' compensation settlement, the question remains as to whether you can still collect Social Security Disability Insurance (SSDI) benefits at the same time. And if so, do the amounts offset one another?

It's time to explore the relationship between the two and answer the following common questions:

Do workers' compensation benefits offset Social Security Disability payments?
How are workers' compensation benefits offset by Social Security?
How is a lump sum workers’ compensation settlement affected by Social Security?
How can I minimize the workers’ compensation offset?
How can I maximize my workers' compensation benefits?

But first, it’s important to understand the complexity of worker's compensation insurance and its effect on Social Security payments. Consulting an independent insurance agent is a good place to start. They can give you the unbiased advice you need and work directly with you to help find the most comprehensive coverage available.

Do workers' compensation benefits offset Social Security Disability payments?

If you’re collecting worker’s compensation benefits and Social Security Disability Insurance (SSDI) payments at the same time due to a work-related injury or illness, you may find you won’t be eligible for the full amount of both. This is known as the "workers’ comp offset" and is subject to a number of complicated rules, regulations, and best practices. 

How are workers' comp benefits offset by Social Security?

Generally speaking, the Social Security Administration (SSA) reduces its SSDI benefits so that the total amount that a disabled worker receives monthly is no more than:

• 80% of the amount the worker earned when they were fully employed. This amount is known as "average current earnings." Note that the average current earnings can be determined by an average of the worker’s earning potential in the one high-earning year, the average of five years, or the average monthly wage that your SSDI benefit amount is based on - whichever is highest is generally used for the offset. 
• Or 100% of the total amount of SSDI received by all members of the recipient's family in the first month that workers' comp benefits were received. This is known as the “total family benefit.” 

The higher amount of each offset is will determine the amount that offset effects, which deducts the excess amount of total benefits received from SSDI. As a simplified example, say that a worker receives $2,000 per month in workers' comp benefits from their previous average current earnings of $3,000 and receives $2,000 from SSDI. This results in a total of $4,000 in combined benefits per month. 

However, the offset then applies to 80% of the worker’s current earnings (80% of $4,000, or $3,200). Total benefits, minus the offset amount, means that the worker’s Social Security benefits will be reduced by $800 ($4,000 - $3,200). Furthermore, these Social Security benefits will be reduced until the month that the worker reaches age 65 or the month that workers’ comp benefits stop, whichever comes first. 

Because workers' comp programs vary widely between states, the rules about how Social Security calculates workers' compensation offsets are often complicated. This is especially true when considering how states classify the following:

• Maximum benefits paid out
• Duration of benefits
• Classification of injuries, known as the "schedule of benefits"
• Ways a claimant can settle a workers' compensation case, such as lump-sum settlements or monthly payments

As you can imagine, the complexity and calculations can be difficult to follow, so contacting an independent insurance agent can help you navigate new laws on the federal and state levels, modified benefit levels, and more. 

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How is a lump sum workers’ compensation settlement affected by Social Security?

If you receive a lump-sum workers' compensation settlement, the amount of the Social Security benefits you and your family receive may be affected by an offset similar to the way that regular weekly workers’ comp payments are. 

The Social Security Administration has several ways of converting a lump-sum workers' comp payment into a monthly benefit. One of the primary determining factors for calculating the offset is related to the language of the workers’ comp settlement document when it is offsetting a lump sum. In most cases, Social Security converts the workers’ comp lump sum to a monthly amount by dividing the lump sum by the periodic workers' compensation payment that the person had been receiving, and then applying the SSDI offset for the resulting number of months.

This is best illustrated with an example:

Suppose a worker was receiving $1,000 per month in workers' compensation payments until the worker entered into a lump-sum settlement for $20,000 (which is close to the average settlement amounts awarded). Social Security will consider the worker to have received $1,000 per month in workers' comp benefits for 20 months ($20,000/$1,000) for purposes of calculating the SSDI offset.

How can I minimize the workers’ compensation offset?

As you can imagine, an offset can dramatically affect the amount that individuals receive from workers’ comp and Social Security disability insurance payments over the course of their lives. There’s a range of complexity when it comes to drawing up documents and acting in accordance with state laws. 

To help, attorneys who specialize in workers' comp cases will often try to draft settlement agreements to minimize any offset of SSDI benefits. Experienced lawyers are able to draft a settlement agreement that excludes things like medical and legal expenses from lump-sum payments that can adversely affect Social Security benefits. This, in turn, results in Social Security excluding these expenses from the workers' compensation offset if the language in the settlement document is clearly stated. 

Because the Social Security carefully analyzes the language of a workers' comp settlement document when deciding how much of the settlement is subject to offset, creating favorable terms can help dramatically minimize the offset. Failure to clearly state health settlements and other factors may result in Social Security asking for documentation of those expenses before excluding those amounts from the offset calculation. Therefore, consulting an attorney or independent insurance agent to discuss your case can be a significant step toward getting the benefits that you’re entitled to. 

Using the previous example, suppose the injured individual who received $20,000 had an attorney draft a settlement that specified the lump sum be divided into monthly payments until they reach the age of 65. If the individual was 30 at the time of their injury, this means the settlement can be broken up into 420 payments - the number of months per year until they reached the age of 65. 

Doing some quick math, that $20,000 settlement would be divided by 420 months, meaning the lump sum would pay out nearly $48 per month. At this rate, the offset may not apply and they could collect both workers’ comp and SSDI with a minimal offset or not incur one at all. 

The rules about workers' compensation benefits and Social Security Disability Insurance are complicated. This is especially true when trying to figure out how your state's workers' compensation works with federal programs that have their own calculations and laws. In order to navigate these systems, consulting a professional is a wise decision. By working with an independent insurance agent, you can be informed about your rights, avoid common pitfalls, and provide you and your family with the benefits that you deserve. 

How can I maximize my workers' compensation settlement benefits?

There are a few actions you can take to help maximize your benefits without hurting your Social Security Disability, like:

• Understand your exclusions: With Social Security, there are a few deductions you can take from your gross workers’ compensation settlement, like attorney fees, rehab costs, and certain dependent payments. Just make sure you keep proper documentation of any costs and your attorney can help you from there.
• Adjust your payments: A lump-sum agreement makes it seem like you're making far more money than you really are. And that can decrease your SSDI benefits. With your attorney, though, you can actually structure your settlement so it appears the opposite, like it's being paid out over a longer period of time. 
• Switch to retirement benefits (if you can): The settlement offset doesn't apply to Social Security retirement benefits, so if you're getting close to retirement, you may want to switch to Social Security retirement benefits instead of SSDI benefits.