How Does a Lump Sum Settlement Affect Social Security Disability?
Social Security Disability (SSD or SSDI) benefits provide needed financial support to qualify workers whose illness or injury leaves them unable to stay gainfully employed. But the time it takes for an SSD claim to be prepared, filed, assessed by the Disability Determination Service, and finally approved can be many months. If your claim is initially denied, it will take even longer.
Disabled workers can’t wait for six or eight months to find out if their claim is granted without receiving any financial support in the meantime. That’s why many workers whose injury or illness is work-related can file for and collect worker’s compensation immediately, and then continue to receive those benefits while they are waiting to learn the Social Security Administration’s (SSA) decision about their SSD benefits.
Maximize SSD Benefits After a Lump Sum Settlement — Consult an Expert SSD Lawyer
Ensuring you maximize your Social Security Disability benefits is our top priority at The Clauson Law Firm. If you are receiving SSD benefits as you wait for a lump sum settlement of your worker’s compensation claim, you should talk with an expert SSD lawyer who knows how your settlement will affect your disability benefits. Your lump sum settlement agreement must be drafted with clear stipulations identifying what funds are paid for which particular purpose, and over how long a period the wage compensation is intended to cover. As you will read in this article, hiring an experienced SSD lawyer to oversee the terms written into your settlement agreement can preserve your rights to continue receiving SSDI benefits when you settle a worker’s compensation or another large claim in which lost wages are included.
The Clauson Law Firm is led by one of the first board-certified Social Security Disability law specialists in North Carolina, Attorney Vaughn Clauson.
Lump Sum Settlements
When worker’s compensation claims involve serious injuries or long-term work-related illnesses, reaching a final settlement with the worker’s compensation insurer can be complicated. Your worker’s comp lawyer will be negotiating for you to be fully paid for your future lost earnings, your lost earning capacity, and for your future medical needs, therapy, and other care required by your disability.
When you finally reach a settlement, the insurance company and your attorney must work out the exact method by which you will receive payment of the total settlement. Will it be in a single lump sum? Or can the settlement be structured in such a way where it will permit you to continue to receive your SSD benefit payments as you were during the months you were waiting?
Your Social Security Disability benefits are intended to replace a portion of your regular earnings during the period of your disability. If you receive a lump sum settlement of a worker’s comp claim in a single payment, with no special terms negotiated into the agreement by your attorney, your SSD benefits can be offset by the amount of the settlement.
What Is a Social Security Disability Offset?
The government’s rules prohibit a disabled worker from “double-dipping.” You can’t collect the same lost wages from two different sources, both worker’s compensation, and SSD. Instead, one or the other benefit payer will reduce the benefit payment to ensure that you are not receiving more than 80% of your usual earnings.
Keep in mind that your SSD benefit is a government program for workers who paid into the system to be supported financially when they suffer an impairment that prevents them from earning enough income to meet daily expenses. The money is intended to replace a portion of your wages or salary. When you are paid worker’s compensation benefits, you are also receiving funds intended to replace your lost earnings.
Receiving a lump sum worker’s compensation settlement must be reported to the Social Security Administration. If the entire amount of the settlement is understood to be compensation for lost wages, then your SSD benefits will be suspended. The SSD benefits are offset by the amount of the lump sum.
How Does the Social Security Administration Determine the Benefit Offset?
To understand the formula used by the SSA to determine the benefit offset, let’s look at an example.
Let’s say a disabled worker named John who was injured at work gets a monthly SSD benefit of $1,500. If he settles a pending worker’s compensation claim for a lump sum payment of $15,000, then his monthly SSD benefit payments will stop. The SSA will divide the total settlement amount by the amount of John’s monthly SSD benefit payment ($15,000 ÷ $1500 = 10). Since the lump sum is equal to ten months of John’s SSD benefits, his SSD benefits would be suspended for ten months. (This example is oversimplified to illustrate the concept. Consult with an SSD attorney for your specific circumstances.)
How Can You Minimize Your Lump Sum Settlement’s Offset of SSD Benefits?
As the example above illustrates, unless some steps are taken to identify exactly which losses are being compensated in the lump sum settlement, the Social Security Administration can presume that 100% of the settlement was to pay lost wages or earnings.
Distinguishing Wages from Other Expenses in Your Lump Sum Settlement Agreement
An experienced SSD lawyer knows that any such large lump sum settlement is intended to pay for much more than just the worker’s wages. For example, how much of the lump sum settlement is designated as the fee for the worker’s comp lawyer who handled the case? If the attorney’s fee is 15% of the settlement, then that means 15% of the lump sum should not be included as an SSD benefit offset.
Your lump sum settlement of a worker’s comp claim will also include money intended to pay your medical bills, either currently outstanding bills or those you will incur for future medical care. The settlement agreement must identify what medical costs are included in the lump sum for the SSA to recognize those funds as exempt from any SSD benefit offset.
Drafting the lump sum settlement agreement with an eye toward reducing the worker’s SSD offset is important. The lump-sum settlement will require the worker to waive any current or future claims against the employer or the insurer relating to the claim. Since the settlement funds are to compensate the disabled worker for their losses for years to come, the settlement agreement can explicitly state that the funds are to be spread over the disabled person’s working life, until their full retirement age.
Applying Proper Settlement Drafting to Our Example:
Let’s look at the example we used earlier; John the disabled worker whose monthly SSDI benefit is $1,500 and who settles his worker’s comp claim for a lump sum payment of $15,000. As we noted earlier, the worker’s comp lump sum settlement will be divided by the monthly SSD benefit amount. The resulting figure, in this case, 10 will be the number of months the SSD benefit is suspended, or offset.
But, if the settlement agreement noted how much of the settlement was earmarked for attorney’s fees (15% = $2,250), and how much is earmarked for specific medical costs (let’s say $4,000), then the remaining funds attributable to the worker’s wages is only $8,750. If we divide that amount by the monthly SSD benefit amount of $1,500, we get 5.8 months during which the SSD benefit payment would be offset rather than the 10 months figured for the offset when we did not identify the non-wage funds included in the settlement.
Finally, if the settlement explicitly stated that the wages were to be spread out over the worker’s lifetime, then the Social Security Administration may not attribute all the settlement’s wage compensation to the worker’s immediate income. By spreading it out over the lifetime of the lump sum recipient, how much could be attributed to the worker’s monthly income each month? If the worker were 50 years old, and their full retirement age was 67, then the wages might be spread out over 17 years, each month applying only a small portion to each month’s earnings.
Whether the SSA fully recognizes or accepts such a stipulation is not a certainty, but to whatever extent the government does accept it as a period over which to spread the settlement, the SSD offset will be reduced.
Monthly SSD Offsets — Spreading a lump sum settlement’s lost wage compensation over a period of years means the SSA will consider a smaller portion of the settlement amount to be earnings each month. Rather than applying a full $1,500 of the settlement to offset the SSD monthly benefit and eliminating the whole SSD payment, the smaller offset each month permits the SSD recipient to continue to receive their monthly benefit, less the smaller offset.
If the SSA decides to allow the lump sum settlement to offset SSD benefits at a rate of $500 each month, then the SSD recipient would still receive $1,000 of their usual benefit payment.