Are There Rules for Spending Your SSDI Back Pay?

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

Social Security has special rules for how some back payments can be handled, but those rules don't apply to everyone. If you're receiving Social Security disability insurance (SSDI) benefits and you control your own funds, you can generally spend your SSDI back pay however you like.

But when you're handling someone else's back pay as a "representative payee," you'll need to follow set spending and documentation rules. Here's what you need to know about Social Security's SSDI back pay spending rules, whether you're handling 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 the 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 your back pay before sending 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.)

When You Receive Other Government Benefits

If you receive SSI in addition to SSDI (called concurrent benefits), you'll need to spend your SSDI back pay fairly quickly (within nine months) to avoid becoming ineligible due to the SSI resource limits. Although it might be tempting just to plunk that wad of cash into savings, hanging on to too much could put you over the asset limit and cause your SSI benefits to stop. (Learn about the SSI asset limit and saving SSI back payments.)

If you might qualify for SSI in the future—even if you aren't currently receiving it—consider SSI's asset rules when deciding how to spend or save your SSDI back pay. Some assets don't count toward SSI limits, like:

• your primary residence
• one vehicle, and
• certain household goods.

If your disability began before you turned 46, you might be able to save money in an ABLE account, because funds in an ABLE account generally don't count toward SSI resource limits up to certain caps.

It's a good idea to keep detailed records of large purchases, transfers, or payments made with back pay—especially if you plan to apply for SSI soon. Social Security might review how you spent the funds to be sure you didn't give the money away, transfer it to family, or otherwise hide it to get under the asset limits.

Best Practices for Managing Leftover SSDI Back Pay

How you use your own lump-sum SSDI back payment is up to you. But that doesn't mean you don't need a plan before you spend that money. A sudden increase in available funds might tempt you to overspend, and it might affect how you manage your regular monthly SSDI benefits.

Consider putting any funds you don't need right away in a separate savings account. Keeping your back pay separate from your day-to-day expense accounts can make it easier to track withdrawals and avoid spending the lump sum unintentionally.

You might also use part of your back pay to cover bigger expenses that you've been putting off, such as:

• scheduling a medical procedure you've been postponing
• repairing or replacing an old vehicle
• having necessary household repairs done
• paying off medical bills
• creating an emergency fund, or
• paying down high-interest debt, like credit cards.

If you're unsure how to budget a large lump sum, talking with a trusted financial counselor or nonprofit credit advisor might help you meet both your immediate needs and your long-term goals. Taking a little time to plan your spending can help ensure your SSDI back pay lasts as long as you need it to.

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 might 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 an SSDI "beneficiary" (recipient) who isn't able to manage their own finances due to mental illness, substance abuse, or mild cognitive impairment.

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 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 conditions or make special purchases.

Using Back Pay to Improve 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 Social Security disability benefits, not just SSI.

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 hairdresser
• 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 SSDI 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.

How Rep Payees Should Handle Leftover SSDI Back Pay

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.

Rules for Children Receiving Dependents Benefits

Social Security doesn't have different rules for back pay benefits for children who receive dependents benefits (as opposed to SSI benefits). Representative payees for children just have to follow the same guidelines that are in place for adult beneficiaries. For a child, this means that the money should first be used to make sure the child has proper housing, clothing, and food, as well as medical care, and any money not needed for immediate needs should be saved for the child's future needs.

Unlike with large amounts of SSI back pay, the representative payee doesn't need to put Social Security back pay into a separate, restricted "dedicated account." The dependent benefits back pay can be mixed with the child's regular monthly benefit checks, but they should be kept separate from the money belonging to the parent or other representative payee.

As a representative payee, you must spend and save the back pay in the child's best interests. So you can spend the back pay on things that improve the child's life, such as:

• a larger apartment or furniture for the child's room
• food and clothing
• school supplies, a computer, or music or sports lessons, and
• summer camp or vacations.

You should save the rest of the back pay in an interest-bearing account. The account should be put in the parent's name followed by "for the beneficiary [child's name]."

If the child also receives SSI benefits for a disability, the representative payee must follow the rules for how SSI back pay and benefits must be spent. (Read more details in our article on rules for spending a child's SSI payment.) For nine months, the Social Security back pay won't count as back pay towards the SSI resource limit.

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 SSDI 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 dependents benefits, or you're managing your own disability back pay, if Social Security sends you too much money, you'll have to pay it back. Overpayments of back pay can happen when circumstances change while an applicant is waiting for a disability decision.

For example, a Social Security recipient's back pay could be reduced by income from part-time or temporary work done while waiting for claim approval. Or a child receiving dependents benefits could have turned 18, or an adult receiving benefits on a former spouse's record could have gotten married, before the claim was approved. These changes can result in overpayments.

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.