Did You Know That Your Workers’ Compensation Settlement Could Reduce Your Social Security Benefits?
Serious work-related injuries will frequently enable the worker to also qualify for Social Security Disability benefits. This is especially true when the worker has other health conditions that limit his/her ability to work. When you reach the point where you are able to settle the Workers’ Compensation claim, beware of the Social Security Disability benefits offset.
While the Social Security Retirement Law was first adopted in 1935 in the midst of the depression under FDR, it was not until 1956, during the Eisenhower administration, that the system was expanded to provide disability insurance in addition to retirement benefits. In 1965, amongst growing concerns over duplication of Social Security and Workers’ Compensation benefits, the federal government amended the Social Security Act to cap the total combined benefits.
How does the offset work? Social Security Disability Insurance benefits (SSDI), taking into consideration Workers’ Compensation benefits, are reduced so that the combined benefits shall not exceed 80 percent of the claimant’s federally-determined “average current earnings.” (ACE). When determining if there is an offset and in what amount, the Social Security Administration assigns great weight to the language of the lump sum settlement agreement. The rules avoid looking beyond the language of the agreement unless the agreement is unreasonable on its face.
The most common way of reducing the potential offset is by reducing the lump sum award by all excludable expenses, then amortizing the net lump sum award over the claimant’s life expectancy (Steam Rolling Method). This generally helps younger disabled workers and workers who were high wage earners. The excludable expenses include legal fees and litigation expenses. By spreading the net lump sum settlement out over the life expectancy of the worker, a smaller number would be included in the federal ACE calculation, generating a smaller Social Security reduction, if any. If this calculation is not made in the settlement, the Social Security Administration may calculate the formula themselves, frequently to the detriment of the claimant.
Here’s an example. Let’s say that a 50-year-old injured worker is able to obtain, with the help of counsel, a $50,000 gross lump sum Workers’ Compensation settlement. First, counsel should take out all excludable expenses. In NH, claimant’s counsel is entitled to a 20 percent attorney’s fee and reasonable litigation expenses. Assuming that the expenses were $200, the claimant would receive a net Workers’ Compensation settlement of $39,800. If the worker is male and 50 years of age, he has a life expectancy of 29.2 years pursuant to the life expectancy tables. With the net lump sum ($39,800) allocated over 29.2 years (350 months), only $113.7 per month is available for “ACE” calculation of potential offset. If the Social Security benefit is $1,050 per month and the ACE is $1,600 per month, with $113.7 added to the Social Security Disability benefit ($1,050 + $113.70 = $1,163.70), the worker is still receiving less than 80 percent (1600 x 80 percent = 1280) of ACE, so that there is no offset at all.
Are there any other ways to avoid or mitigate the offset? Yes. Under the Front Loading Method, the excludable expenses will be considered as if paid out first. No offset occurs during that period. This works for older claimant’s generally between the age of 62 and 65 especially if the ratio of excludable expenses to the total amount of the award is relatively high.
Using the Rear Loading Method, the excludable expenses are considered as if paid at the end of the periodic payments. No offset occurs during this period. This may help in some circumstances, but I can’t think of any.
When does the offset not apply? The offset rules do not apply if your client is entitled to Supplemental Security Income (SSI) benefits. The offset rules also do not apply to Personal Injury awards. In fact, depending on the circumstances of your Personal Injury case, a disability determination by Social Security may increase the value of your case.
The offset also does not affect Social Security Retirement benefits, nor do they apply in 16 Reverse Offset states (not NH) that offset the Workers’ Compensation benefit rather than the SSDI benefit. Also, remember that the offset only applies to people under 65. No offset once you are 65 even though the retirement age is extended beyond that age.
Here’s a final suggestion. Since the cumulative benefits can reach 80 percent of the worker’s average current earnings, it is still a good idea to apply for Social Security Disability benefits and Workers’ Compensation benefits where appropriate.