Does a Workers’ Compensation Settlement Affect Social Security Disability?
Workers’ Compensation claims benefit workers who are injured on the job due to work-related accidents. These benefits include medical treatment for work-related conditions, as well as cash payments that replace lost income. It is important to know that a workers’ compensation settlement amount can potentially impact Social Security Disability benefits. This article will highlight how different payments, especially lump-sum settlements, interact with Social Security Disability Insurance (SSDI) and how to avoid potential reductions. Let’s answer the quesiton, Does a Workers’ Compensation Settlement Affect Social Security Disability?
What Is Social Security Disability Insurance (SSDI) and Who Qualifies?
Social Security Disability Insurance (SSDI) is a federal program that provides financial assistance to individuals with disabilities. According to the Social Security Administration (SSA), benefits are awarded to individuals who are unable to hold any gainful employment due to being disabled.
To be eligible for SSDI benefits, you must (1) have worked in jobs covered by Social Security (therefore building “credits”), and (2) have a medical condition that meets Social Security’s strict definition of disability. Qualified candidates can receive monthly payments, as well as a potential lump sum backpay payment if the date of disablement is determined to be prior to the application’s approval.
Workers’ Compensation Programs and Their Purpose
Workers’ compensation is a form of insurance that is required for most employers to carry, which provides financial and medical benefits to employees who suffer work-related injuries or illnesses. These programs are state-mandated and are designed to provide benefits to injured workers.
They ensure that workers injured on the job have access to medical care and receive compensation to cover a portion of their lost wages while they are unable to work, among other benefits (such as potential awards for future wage loss). Workers’ compensation plans protect employers by limiting their liability for workplace injuries, while also providing a crucial social role by preventing injured workers and their families from falling into poverty due to lost wages or high medical costs.
How Workers’ Compensation Settlements Interact with Social Security Disability
A workers’ compensation settlement can affect Social Security Disability Insurance (SSDI) benefits. The Social Security Administration (SSA) can reduce SSDI benefits if the combined total of SSDI and workers’ compensation benefits exceeds 80% of the recipient’s “average current earnings” (as calculated by the SSA). This reduction is known as an “offset,” and ensures that the total amount received does not exceed this threshold.
The SSA determines the offset amount using the higher of two limits: 80% of the worker’s average current earnings or the total family benefit amount. The reduction continues until the individual reaches age 62 or 65, depending on specific conditions.
Offset Example:
David can no longer work due to disability. Before he became disabled, his average earnings were $5,000 per month.
Under the law, David is entitled to a maximum of only 80% of that $5,000 per month, i.e. $4,000, in monthly SSDI + Workers Compensation benefits.
David becomes eligible to receive $2,000 per month in Workers’ Compensation benefits, but is already receiving $2,500 per month in SSDI benefits. This would equate to a total of $4,500 per month, which exceeds the maximum benefits amount allowed by law by $500 ($4,500 total, less $4,000 per month maximum, equates to $500 over the maximum).
In this scenario, the SSA will calculate an offset using the following equation:
$4,000 (maximum benefit amount) – $2,000 (workers’ comp benefits) = $2,000 (what SSDI will pay).
As seen above, SSDI in this scenario would pay $2,000 per month, and when added to the $2,000 per month paid by Workers’ Compensation, this equates to $2,000, which is the $4,000 maximum benefit amount allowed by law in David’s situation.
The “Workers’ Compensation Offset” amount is the difference between what David was initially eligible for in SSDI benefits vs. what is actually now paid:
$2,500 (original SSDI benefits) – $2,000 (what SSDI now will pay) = $500 (workers’ comp offset)
Of note, the $500 offset in the above example has additional tax implications, which Tomack Law, PLLC can explain in great detail in a free consultation.
The Impact of Lump-Sum Settlements on SSDI Benefits
Lump-sum settlements in workers’ compensation are a method to resolve claims with a one-time payment for a work-related injury or illness. An example of this is a Section 32 Waiver Agreement, which is a voluntary agreement between the insurance carrier and the claimant which resolves some or all of the outstanding issues in a claim, in exchange for a lump-sum settlement. This settlement usually releases the employer or insurance company from future obligations related to the workers’ compensation claim, including indemnity benefits, medical benefits, or both.
Regarding how such lump-sum settlements affect SSDI, the SSA may not necessarily reduce your benefits by the full lump sum settlement. Instead, depending on your earnings record, your SSDI benefits may not be reduced at all.
Instead, the SSA may divide your lump sum settlement by the number of years until you reach retirement age, effectively spreading the settlement amount over the period you would have received monthly workers’ compensation checks if you had not accepted the lump sum.
In other words, the lump sum is prorated to reflect the monthly rate that would have been paid had the lump-sum award not been made (medical and legal expenses incurred by the worker in connection with workers’ compensation may be excluded when computing the offset). The SSA would then reduce your monthly SSDI payment by the equivalent monthly workers’ compensation amount.
Calculating the Offset: Total Amount and Monthly Payments
The total amount of a workers’ compensation settlement is usually calculated by determining the present value of future periodic payments due to the injured worker. This amount is often derived by prorating the total settlement over the period it represents.
When calculating the offset for SSDI payments, the SSA considers this amount. If the combined workers’ compensation and SSDI benefits exceed 80% of the worker’s average current earnings, then SSDI payments will be reduced accordingly.
For instance, if a worker’s average monthly wage is $3,000, and the SSDI payment is $1,500, the maximum combined amount from both sources cannot exceed $2,400. Any amount over this limit will result in a reduction in SSDI benefits.
Strategies to Minimize the Impact on Your SSDI Benefits
To reduce the impact of a workers’ compensation settlement on SSDI benefits, Tomack Law, PLLC will discuss with you the consideration of structuring the settlement as a annuity (periodic regular payments) rather than a lump sum. This method involves prorating the payment over a longer period, which can decrease the offset to SSDI benefits.
It’s crucial to include precise language in the settlement agreement specifying how the payments should be allocated, in order to avoid a significant reduction in SSDI benefits. Consulting with a lawyer familiar with workers’ compensation and SSDI, such as David I. Tomack, Esq., can help navigate these complex interactions effectively. Annuity
Conclusion
In conclusion, workers’ compensation settlements can affect Social Security Disability Insurance (SSDI) benefits, particularly when the combined total of both benefits exceeds 80% of the worker’s average earnings. To reduce this impact, consulting with a knowledgeable NY Workers Comp attorney at a law firm such as Tomack Law, PLLC can help manage the potential offset by utilizing strategies such as structuring settlements over a longer period. Understanding these interactions is essential for maximizing benefits and safeguarding financial stability.
FAQs: Workers’ Compensation and Social Security Benefits
How does workers’ compensation affect SSDI benefits?
Workers’ compensation benefits can reduce SSDI payments if the combined amount exceeds 80% of the worker’s average pre-disability earnings.
Can you receive both benefits?
Yes, but an offset may apply, reducing the SSDI benefit amount.
Can you structure your settlement to avoid reducing SSDI benefits?
Yes, by structuring it with specific language to limit the offset impact, such as spreading the payments over a longer period.
If I receive a workers’ compensation lump sum, how does this impact my Social Security benefits?
If you receive a workers’ compensation lump sum payment, it can have an effect on your Social Security Disability Insurance (SSDI) benefits. SSA may be in a position to apply an offset, which lowers your SSDI payments if the combined total of both your workers’ compensation and your Social Security benefits exceeds 80% of your average current earnings before your disability occurred.
Can a one-time payment decrease my Social Security benefit?
Yes, an award of workers’ compensation paid in a lump sum can, if not arranged correctly, decrease your Social Security Disability Insurance benefits. The SSA can amortize the lump sum payment over the period during which the regular payments would have covered it, thus decreasing your monthly SSDI amount. The help of an experienced attorney like David I. Tomack, Esq. will make a difference in structuring the lump sum in such a way as to minimize the impact on your Social Security benefits.
Do I pay Social Security taxes on my workers’ compensation lump sum?
Workers’ compensation benefits, including a lump sum received, are generally not subject to Social Security taxes. That being said, it is helpful to understand how such payments may impact your SSDI benefits as a result of the offset rule the SSA implements, and there may be additional tax implications when addressing offsets.
How does my work history factor into Social Security benefits after receiving workers’ compensation?
By and large, your work history is significant in determining the amount of your Social Security Disability Insurance benefits. One must have sufficient “work credits” based on their work history to qualify for SSDI benefits. Workers’ compensation benefits as such do not impinge upon your history of work; it may be the offset from a lump sum payment that could reduce the amount of your SSDI benefits.
How do workers’ compensation disability payments affect my amount of Social Security benefits?
Workers’ compensation disability payments may reduce your Social Security Disability Insurance benefit if the total of both combined is above 80 percent of your average current earnings. This is known as the workers’ compensation offset.
What determines how much I receive from Social Security if I am also receiving workers’ compensation?
The amount of SSDI benefits combined with workers’ compensation depends on a number of factors that come into play, which include one’s average current earnings before disability, the amount of workers’ compensation benefits, and specific rules of the offset applied by the SSA. Proper structuring of workers’ compensation settlements-like spreading a lump sum over time-can help reduce the impact on your SSDI benefits.
