How to Handle Large Payments of Disability Back Benefits

The Social Security Administration (SSA) can take a long time to approve disability benefits—sometimes up to two years. If you have to wait very long for a disability decision, you'll be entitled to a large back payment of past-due disability benefits.

Social Security has special rules for how some back payments must be handled. The rules differ depending on the type of disability benefits you receive and whether you're spending your own back pay or you're a representative payee handling large back payments on behalf of someone else (the "beneficiary").

Here's what you need to know about Social Security's SSDI back pay rules when spending your own benefits or someone else's.

Rules for Spending Your Own Disability Back Pay

Social Security has different back payment spending rules depending on what type of disability payments you're receiving:

• Social Security disability insurance (SSDI), or
• Supplemental Security Income (SSI).

SSDI Back Pay Spending Rules

Although Social Security generally won't tell you how to spend your own monthly SSDI benefits, some factors could affect how you handle a large lump-sum back payment. (SSDI benefits can actually go back "retroactively" to a year before your application date if you were disabled for that long, so SSDI back pay amounts can be as high as $50,000 or $100,000 in some cases. Learn how Social Security calculates back pay.)

Social Security has no spending restrictions on SSDI back payments if you're the beneficiary. You can use that money however you like or you can choose to save it. But there are some expenses you might need to cover.

First, if you hired a disability attorney or advocate to help with your claim, your legal representative will be paid from the back pay owed to you. Social Security will take the attorney's fee out of the back pay before the agency sends your lump sum to you. Attorney's fees are generally a few thousand dollars, but can go up to $9,200, Social Security's limit. (Learn more about how Social Security disability lawyers are paid.)

Second, the Internal Revenue Service (IRS) considers SSDI benefits as taxable income if you earn above a certain amount. Even if your only income is SSDI and your monthly amounts aren't enough for the IRS to consider them taxable, your lump-sum back payment might be enough to push you over the limit for that year. But if you know how to do it, you can make some of the back pay count toward prior years to keep this from happening. (Learn how to file taxes on disability back pay.)

Spending Your Own SSI Back Payment

Although you won't have to pay taxes on your SSI payments (it's not taxable under federal rules), Social Security will pay your attorney or advocate using part of the SSI back benefits you're owed. The agency won't tell you how to spend the remaining back pay you receive, but you'll need to spend it fairly quickly to avoid becoming ineligible due to the SSI resource limits (more on this below).

Although it might be tempting just to plunk that wad of cash into savings, hanging on to too much could put you over the SSI asset limit and cause your benefits to stop. Learn all the rules about spending and saving SSI back payments.

Back Pay Spending Rules for Representative Payees

Social Security has a lot more spending rules for representative payees, who are usually family members or friends who manage disability payments for someone who may not be able to. If a disability recipient has a representative payee, it means that the SSA believes they aren't able to handle their own money responsibly.

If You're a Representative Payee

You might be appointed as a representative payee for a "beneficiary" (recipient) who isn't able to manage their own finances due to:

• mental illness
• substance abuse, or
• disease progression.

All minor children receiving Social Security benefits will also have a representative payee. (Learn more about how Social Security chooses a representative payee.)

Spending Restrictions for You as a Payee

As a representative payee, it's your responsibility to make sure the child or other beneficiary you're assisting has all their immediate needs met. Current needs include anything the beneficiary needs right away, such as:

• food
• clothing
• rent
• security deposit
• utilities (heat and water), and
• basic home furnishings..

Remember that the Social Security benefits you receive on behalf of someone else—including SSI and SSDI back payments—must only be used for the beneficiary's welfare.

After taking care of the beneficiary's immediate needs for food, shelter, and clothing, you can spend some of the back pay to improve their living condition or make special purchases.

Using Back Pay to Improve the Beneficiary's Living Conditions

If there's money left over after paying for the beneficiary's immediate needs, you must use the remaining disability funds as follows:

• to meet the beneficiary's continuing basic needs
• for the beneficiary's medical care, or
• to improve the beneficiary's living conditions.

Remember, these rules apply to both Social Security disability benefits and Supplemental Security Income payments.

Ongoing Expenses That Social Security Back Pay Can Cover

As a representative payee, you can spend the beneficiary's Social Security back payments for ongoing expenses like:

• grocery delivery
• insurance premiums, or
• in-home assistance (for example, housekeeping).

Spending the Beneficiary's Back Pay on Medical Expenses

If the beneficiary has significant health-related costs not covered by insurance, you can use the back pay to cover these expenses. In fact, you can use the beneficiary's back pay for most medical equipment and costs that aren't covered by health insurance, like:

• physical or occupational therapy
• a motorized wheelchair
• reconstructive dental care, or
• hearing aids.

Using Back Pay to Enhance the Beneficiary's Life

It's okay for a representative payee to use a beneficiary's Social Security back pay to cover the cost of things that make the beneficiary's life better, such as:

• entertainment (movies, games, magazine subscriptions, travel, dining)
• visits to the barber or hair dresser
• special education or other training programs, or
• modifications to a car to accommodate the beneficiary's disability (like hand controls).

The key is to always spend the money in ways that directly benefit the disability recipient.

Using Back Payments for Special Purchases

In some cases, there might be enough money left over to make significant major purchases that would greatly improve the beneficiary's life. Here are some examples of major purchases a representative payee can make with the beneficiary's back pay.

Buying the Beneficiary a Home

You can use the Social Security funds to make a down payment on the purchase of a home for the beneficiary or to pay the individual's mortgage.

Using Back Pay for Home Repairs

If the beneficiary already owns a home, you can use the money to make repairs and to improve the beneficiary's access to and enjoyment of the home. Examples of these kinds of improvements are:

• adding a wheelchair ramp
• widening doorways
• installing lower countertops
• creating a bathroom that accommodates the beneficiary's disability (for example, special tubs or shower units), and
• installing a home security or alert system.

Home Furnishings for the Beneficiary

Back payments can be used to buy furnishings (for example, a television) for the beneficiary's home—even if the beneficiary lives in a home with other people.

Spending Back Pay on Automobile Expenses

Back payments can be used as a down payment on an automobile or to make monthly payments on a car or truck. But the vehicle must be used and owned by the beneficiary. If the beneficiary already owns a car, the money can be used for vehicle repairs.

Using Back Pay for Other Special Purchases

If you're unsure whether the purchase you plan to make is allowed, or you have other questions about what special purchases you can make with the beneficiary's funds, ask Social Security before you spend the money. You can speak with a Social Security representative by calling 800-772-1213.

Protecting the Beneficiary's SSI Eligibility

Supplemental Security Income is a need-based benefit for disabled people with little or no work history and few assets. If you're a payee for an SSI recipient, you must be particularly careful about how back payments are spent.

Even if a representative payee handles their money, a beneficiary with more than $2,000 in countable assets ($3,000 for couples) will no longer be eligible for SSI. As the rep payee, it's your responsibility to handle back payments in a way that protects the beneficiary's SSI eligibility.

If too much back payment money is left in a bank account, it could result in the beneficiary losing eligibility for benefits. And certain items you purchase could be valuable enough to negatively affect the beneficiary's eligibility to keep receiving payments.

Fortunately, not all assets, like the beneficiary's primary home or car, count toward the SSI asset limit. Learn more about which assets count toward the SSI asset limits.

How Representative Payees Should Handle Leftover SSI Funds

If there's disability back pay money left over after the above expenses are paid, the representative payee must save it on behalf of the beneficiary. Although Social Security doesn't dictate how the money should be saved, the agency recommends the following:

• placing the funds in a state- or federally-insured, interest-bearing bank account, or
• using the money to purchase U.S. Savings Bonds.

Keep in mind that an individual SSI recipient can't have more than $2,000 in assets, or the beneficiary might lose eligibility for SSI. Fortunately, Social Security has a couple of procedural rules in place that help protect otherwise eligible individuals from losing SSI benefits:

• Large back payments (more than a couple thousand dollars) are split into three payments, spread six months apart.
• Representative payees have nine months to spend any back payment funds before the funds count as a resource for SSI purposes.

Learn more about when back payments are made in installments.

Special Rules for Disabled Children on SSI

Social Security has special rules for back pay benefits for disabled or blind children who receive SSI. Representative payees must handle SSI received for a child differently than SSI for an adult beneficiary.

Dedicated Accounts for Children's SSI Past-Due Payments

Lump-sum payments of past-due benefits for disabled or blind children must generally be deposited into a "dedicated account." A dedicated SSI account is one that's used only for the child's benefit payments and to pay specific expenses related to the child's disability.

A dedicated account must be kept separate from any other savings or checking accounts. You can't put the child's SSI back pay into any of the following accounts:

• savings accounts already established for the child
• accounts belonging to the child's parents, and
• any of the payee's banking accounts.

Learn more about setting up a dedicated account for a child receiving SSI.

Maintaining a Child's Eligibility for SSI

Unlike adult recipients, Social Security won't count the funds in the child's dedicated account as a resource toward SSI eligibility. So, even if the account holds a large amount of money, it can't disqualify the child from receiving benefits. Social Security also won't count any interest earned on the dedicated account as income. So that won't affect the child's eligibility either.

Permitted Uses for a Child's Back Pay

Social Security has strict guidelines that dictate how the money in a child's dedicated account must be spent. These funds can only be used to pay for the following expenses for the child:

• medical treatment (not covered by insurance)
• education
• job training
• personal needs assistance, and
• other necessary and appropriate items or services related directly to the child's disability.

Personal needs assistance is any help that is required that relates directly to the child's disability, such as:

• a motorized wheelchair (or other special equipment)
• therapy and rehabilitation (not covered by insurance)
• a wheelchair ramp in the child's home, and
• vehicle modifications needed to transport the child.

About "other necessary and appropriate items or services," Social Security doesn't define what items or services are "necessary" or "appropriate." Contact Social Security if you're unsure whether an expense is a "necessary and appropriate" item or service.

Read more details in our article on how a child's SSI payment is supposed to be spent.

Repayment of Misspent Back Pay

If you use money from the child's dedicated account in ways other than those outlined above, you'll likely have to repay the money using your own financial resources. So, it always pays to check with Social Security before you spend the child's back pay on other expenses.

Learn more about handling a child's SSI benefits in Social Security's Guide for Representative Payees.

Keeping a Record of Back Pay Spending

Representative payees are required to file a report with Social Security once a year that details how a beneficiary's money was spent. But Social Security can ask to look at the records more than once a year.

And if you're a representative payee and you misuse the benefits you're managing for someone else, you could face criminal charges that could lead to steep fines and even jail time. Learn more about the records you need to keep as a representative payee.

Watch Out for Overpayments of Disability Back Pay

Whether you're the representative payee for someone receiving disability benefits or it's your own disability back pay, if Social Security sends you too much money, you'll have to pay it back. Overpayments of pack pay happen most often when the beneficiary's circumstances change while waiting for a disability decision.

For example, a recipient's back pay could be reduced by income from part-time or temporary work done while waiting for claim approval. And for SSI recipients, any increase in the beneficiary's income or assets, like receiving a small inheritance, could change the amount of benefits due. That includes even temporary increases to in-kind income.

If you must repay money to the SSA, you can often make payment arrangements. Learn more about what you can do if Social Security says you were overpaid.