How Does a Lump Sum Settlement Affect Social Security Disability?
A large personal injury settlement generally does not affect Social Security Disability Insurance (SSDI) benefits but can directly affect Supplemental Security Income (SSI) benefits. It can cause a reduction or loss of the SSI benefits. A lump sum workers’ compensation settlement can reduce one’s disability benefits.
An in-depth understanding of how a settlement impacts disability benefits can help people protect their benefits from a significant reduction or elimination.
Personal Injury Settlements and Disability Benefits
The Social Security Administration (SSA) oversees the administration of SSDI and SSI benefits. A personal injury lawsuit can lead to a significant settlement award. The effect of such an award on disability benefits depends on the Social Security disability program through which a person receives benefits.
Typically, a person collecting SSDI benefits should not be impacted by an injury settlement award, even if he or she receives a large monetary award. That is because the person’s employment history, rather than his or her financial resources, determines the SSDI benefits.
A person who has a qualifying disability and has accumulated enough work credits is eligible for benefits. Suffering a personal injury and receiving compensation for it does not affect these work credits. As a result, a personal injury settlement should not have a direct impact on SSDI benefits.
A large settlement can reduce a person’s monthly SSI benefits or even make him or her ineligible. SSI is a needs-based program that people can become eligible for provided they meet certain income and asset limitations. Beneficiaries have to pass an asset test to maintain eligibility. The test includes nearly all the income and payments people receive, including settlement awards.
A settlement can increase the value of a person’s financial resources, resulting in decreased SSI payments. A large settlement amount can push a person over the program’s preset income and resource limits, causing the person’s benefits to be suspended or terminated.
How to Protect SSI Benefits After a Personal Injury Settlement
Accepting a lump sum payment is likely to disrupt SSI eligibility. Nevertheless, there are several ways that individuals can protect their SSI benefits and still get their personal injury settlement.
Spending Down Settlement Proceeds
Spending down refers to the process of spending excess settlement funds on exempt resources to put the disabled recipient back under the allowable asset maximum. It is typically done the same month the recipient receives the lump sum payment. Qualifying expenses that a recipient can use the funds on include:
- Making home modifications to accommodate one’s disabilities
- Paying off a home mortgage
- Paying off student loans, credit cards and other existing debt
- Prepaying one’s funeral expenses
Setting up a Special Needs Trust
People can protect their SSI eligibility by transferring the settlement to a special needs trust. The trust will set aside the funds to cover the expenses that SSI does not cover, such as nursing home care or certain therapies and legal services, while letting a person maintain SSI eligibility. The process of creating this type of trust can be complicated, so consulting with an attorney is beneficial.
Workers’ Compensation Settlements and Disability Benefits
People who receive SSDI benefits can also collect workers’ compensation payments for the same disability if it was caused by a work-related illness or accident.
For example, when identifying what eye problems qualify for disability benefits, one of the illnesses individuals will come across is hemianopia. Traumatic brain injuries can cause hemianopia. A worker eligible for SSDI benefits because of hemianopia may also receive workers’ compensation benefits if a work-related injury led to the condition.
How Does a Lump Sum Workers’ Comp Settlement Affect Social Security Disability?
The SSA cannot allow people eligible for both benefits to simultaneously get the maximum amount of each, regardless of whether they are getting the workers’ compensation benefits as a lump sum settlement or in installments. The workers’ compensation and SSDI payments combined should not exceed 80% of a person’s average earnings before he or she became ill or injured.
Generally, if the total amount of the benefits exceed 80% of an individual’s typical pre-disability earnings, the individual will have the excess amount deducted from his or her SSDI benefits. This reduction of SSDI benefits by the amount necessary to meet the 80% cap federal requirement is known as a benefit offset. The SSA applies an SSDI offset to prevent SSDI recipients from “double-dipping” or collecting the same lost wages from two different programs.
SSDI benefits help workers who have paid into the system to receive financial support that replaces a portion of their wages or salary when they suffer a disabling illness or injury. People who receive workers’ compensation benefits also get funds supposed to replace their lost earnings. Consequently, one benefit payer will have to lower the benefit payment to ensure people do not receive more than 80% of their usual earnings.
When offsetting SSDI payments, the SSA accounts for the fact that eligible SSDI beneficiaries are likely to take lump-sum workers’ compensation settlements. A common way for offsetting SSDI payments is by converting the settlement into monthly amounts. The agency divides the lump sum by the periodic payments a person had been getting and then applies the SSDI benefit offset for that number of months.
How to Minimize the SSDI Offset Amount
The rules regarding benefit offsets provide several opportunities to minimize the amount subject to offsets. As a result, Social Security Disability Insurance attorneys use several methods to reduce the potential SSDI benefit offsets and maximize the amount of benefits that people can keep.
Language of the Settlement Agreement
When calculating offsets, the SSA looks closely at the language in the workers’ compensation settlement agreement. If the language in the agreement is unclear or without any special terms negotiated into it, the SSA can consider the entire settlement amount when offsetting one’s SSDI benefits.
Attorneys can exclude legal and medical expenses from the lump sum, making the SSA deduct them from the total settlement amount before computing one’s offset. The agency will require documentation of the expenses a person wishes to deduct from his or her workers’ compensation settlement.
A disability attorney can help include specific language that will identify the settlement amount intended to pay expenses like:
- Current medical bills
- Future medical expenses
- Attorney’s fees
- Litigation costs
An SSDI recipient can also reduce potential benefit offsets by including an amortization provision. Through this method, the settlement agreement states explicitly that the lump sum settlement is supposed to spread over the rest of an individual’s lifetime rather than be collected at once. The method can eliminate the offset or decrease it significantly.
For example, if a person receives a total of $1,500 a month in SSDI benefits, instead of having a full $1,500 of the settlement applied to offset the monthly benefit and eliminate the whole SSDI payment, a smaller offset every month allows the SSDI beneficiary to continue receiving more of his or her benefit each month.
If the lump sum settlement offsets the benefits at a rate of $400 every month, the beneficiary will still get $1,100 of his or her usual disability benefit payment.
The amortization provision should be included in the original lump sum settlement documents. Adding it to an existing settlement agreement is prohibited. The SSA will consider that as blatantly attempting to circumvent the SSDI offset.
Reporting Lump Sum Settlements
When a person who receives disability benefits accepts a lump sum settlement, he or she must report the settlement to the SSA within 10 days of receiving it. People can face severe penalties if they fail to report lump sum settlements.
Receiving disability benefits should not stop people from pursuing the claims for damages they have against other parties. With careful planning with disability lawyers, they can structure lump-sum settlements in ways that minimize their impact on disability benefits.