Some workers who are eligible for Social Security disability benefits may also be eligible to receive workers' compensation benefits if they have work-related illnesses or injuries. However, workers aren't able to receive the full amount of Social Security benefits and workers' compensation benefits at the same time.
In most situations, Social Security requires that Social Security disability insurance (SSDI) benefits be reduced so that the total monthly amount that a disabled worker receives is no more than 80% of the amount she earned when she was fully employed. The process of Social Security reducing disability benefits to account for worker’s compensation is called a worker’s compensation “offset.” The rules about how Social Security calculates worker’s compensation offsets are complicated. Worker’s compensation programs vary from state to state, and each state has different rules about things like the maximum workers' compensation that can be paid out, the different categories of benefits, and the ways a claimant can settle a worker’s compensation case.
How Social Security Calculates the Offset
To calculate the amount of the offset for a particular recipient, Social Security first determines what it calls the “applicable limit,” or the maximum total monthly amount of combined benefits that the recipient is allowed to get under federal law.
When a claimant receives more money than the applicable limit in any given month, then Social Security offsets SSDI in the amount required to bring the total back down to the applicable limit. Worker’s compensation offsets of SSDI happen more often to those who earned lower incomes when they were working, because their applicable limits are lower and more easily exceeded once the worker starts to receive SSDI and worker’s compensation.
Applicable Limit (Maximum Amount of Benefits)
The applicable limit is the higher of either:
- 80% of the worker's pre-injury income, called “average current earnings,” or
- the total amount of SSDI received by all of the members of the recipient's family in the first month that worker’s compensation is received, called the “total family benefit.”
For most SSDI recipients, the 80% of earnings figure will be higher, and Social Security will use that figure in the offset calculation.
Average Current Earnings
How does Social Security calculate average current earnings? It takes the highest one of the following three amounts.
- the average monthly wage that your SSDI benefit amount is based on (the technical term for this is your “unindexed primary insurance amount”)
- the “high five,” or the average monthly earnings from the highest five years in a row, or
- the “high one,” or the average monthly earnings from a single calendar year, either the year the person’s disability began or any one of the five calendar years before that year.
For the vast majority of SSDI recipients, Social Security finds average current earnings by using the “high one” test.
Reduction of SSDI
First Social Security calculates 80% of the average current earnings (or uses 100% of the total family benefit, if that is higher) to come up with the applicable limit. Then it adds the monthly SSDI benefit to the monthly worker's compensation benefit. If the benefit total exceeds the applicable limit, Social Security will reduce SSDI until it reaches the applicable limit. Social Security will offset SSDI in this manner until the recipient reaches full retirement age and begins collecting Social Security retirement benefits instead of SSDI.
Some states offset their worker’s compensation benefits to account for SSDI, in the same way that Social Security offsets SSDI to account for worker’s compensation. This is called a "reverse offset." Social Security will not offset SSDI when the state is already offsetting worker’s compensation, as long as the state worker’s compensation law that requires the offset was in effect before February 18, 1981.
States that apply a reverse offset might not apply it to all types of worker's compensation benefits. Fifteen states have some kind of reverse offset rule, even if it does not apply to all types of worker's compensation benefits.
Lump Sum Workers’ Compensation Settlements
Many worker’s compensation claimants will settle their cases before a hearing or trial. In many cases, disabled workers give up any entitlement to monthly worker’s compensation benefits in exchange for the employer paying an immediate lump sum payment. Social Security is wise to this fact and will offset SSDI benefits to account for a lump sum settlement.
Social Security has several ways of converting a lump sum workers' comp payment into a monthly benefit for the purposes of calculating an offset, and it will take a close look at the language of the settlement document when it is offsetting a lump sum. In the most basic method, Social Security converts the lump sum to a monthly amount by dividing the lump sum by the periodic worker’s compensation payment that the person had been receiving, and then applying the SSDI offset for the resulting number of months.
For example, Mr. Jones is 25 years old and had been receiving $1,200 per month in worker’s compensation payments until he entered into a lump sum settlement for $24,000. Social Security will consider Mr. Jones to have received $1,200 per month in worker’s compensation benefits for 20 months ($24,000/$1,200) for purposes of calculating the SSDI offset.
Minimizing the Social Security Offset
Worker’s compensation attorneys often try to draft settlement agreements to minimize any offset of SSDI benefits. Social Security will look at the language of the worker’s compensation settlement document to decide how much of the settlement is subject to offset.
For example, Mr. Jones’ attorney might specify that the $24,000 is meant to be a $50 per month payment for every month until he reaches 65 ($24,000/480 months). Social Security would calculate any SSDI offset based on $50 per month for 480 months. Because Mr. Jones would have a lower monthly income from workers' comp, he would lose less SSDI, or might escape the offset entirely.
Lawyers also will draft the settlement agreement to exclude medical and legal expenses from the lump sum that is counted for Social Security. Social Security will exclude these expenses from being used to calculate the offset if the language in the settlement document is clear. If this language is not included in the settlement agreement, Social Security may ask for documentation of medical and legal expenses before disregarding those amounts from the offset calculation.
Rules about what issues can be settled and what language needs to be in a settlement agreement all come from state law, not federal law, and so they vary from state to state. If you are worried about Social Security reducing your SSDI benefits because of a workers' compensation award, you should consult a disability attorney to help you resolve your worker’s compensation case in a way that leaves you with the most money possible each month.