The Interplay between Workers’ Compensation and the Social Security Offset
By FORGE Consulting

If an injured worker is awarded both Social Security disability benefits and workers’ compensation benefits, the worker’s Social Security disability benefits could be greatly reduced by the amount of workers’ compensation benefits received.  A workers’ compensation attorney can save his client a significant amount of money (in Social Security Benefits) by ensuring that appropriate language is included in workers’ compensation settlement that stipulates that the settlement compensates the worker over the remainder of his or her life expectancy.

Put another way, if an attorney fails to include the Social Security language in a workers’ compensation settlement, the injured worker will likely lose a significant amount of his Social Security benefits, costing the client money and putting the workers’ compensation attorney at great risk of malpractice exposure. 

If you get nothing else out of this discussion, remember this: the Social Security Administration will recognize the offset avoidance language only if it is in the original settlement order!  Once your client’s workers’ compensation case is settled and the client applies for Social Security disability, if the language is not already in the workers’ compensation settlement IT IS TOO LATE!  If you represent injured workers in workers’ compensation cases, you should put language addressing the Social Security offset in every settlement.

This article will explain how the workers’ compensation/Social Security disability offset works, what an attorney needs to do to ensure that the language is correct, and some pitfalls a workers compensation attorney should be aware of.

 How the offset law works and why the language is important:

Federal Law requires that individuals who receive both workers' compensation and Social Security disability benefits cannot receive a total amount of benefits greater than 80% of the workers’ pre-injury income.[1]  The Social Security Administration uses a formula to determine the maximum total benefits from both programs that a claimant can receive then they reduce the Social Security disability benefits to stay below that figure.

In order to calculate the total amount of benefits that can be received from both programs, the Social Security Administration will first determine the 80% maximum allowance and will convert it to a maximum total combined monthly benefit.[2] The Social Security Administration will then calculate the amount of workers' compensation benefits received in temporary checks and determine the amount received each month.[3]  Social Security will then subtract the workers’ compensation monthly amount from the 80% maximum monthly amount; the difference is the maximum that Social Security will pay each month, even if the disabled individual's normal Social Security disability benefit would be much higher.[4]

In the case of large monthly workers' compensation benefits, or low past wages, the reduction may be total, thus the individual may not be entitled to Social Security benefits at all during the time the individual gets periodic workers’ compensation benefits.

When a lump sum is awarded in a workers’ compensation case, the Social Security Administration does not have a "monthly" amount to use to calculate the offset, but that does not mean that the offset will end.  Instead, by default, they treat the lump sum as if the temporary checks continued.  The purpose of the Social Security language in the workers’ compensation order is to avoid this default rule.

Without the Social Security language in the workers’ compensation order, Social Security takes the amount of the settlement, exclusive of attorney’s fees, medical expenses, and other case expenses, and divides by the monthly amount of workers’ compensation benefits that the disabled worker was receiving in temporary periodic payments.  The result of this calculation is the number of months the full offset will continue; thus, the offset will remain the same even though the individual is no longer getting temporary checks from workers' compensation.

For example, if your client were to receive $400.00 per week in temporary workers’ compensation checks, then were to get a lump sum settlement of $40,000.00 (after attorney’s fees and expenses), then the offset would continue for 100 weeks after the settlement.[5]

 The language that should be in the order:

 

In order to keep the Social Security Administration from continuing the same offset, the law allows the workers' compensation settlement to contain a "life expectancy" clause.  This clause indicates that the lump sum is not just a continuation of the temporary checks commuted to one payment, but is instead a settlement of a disputed case, and is to compensate the worker for the lifetime of future impairment.  The clause states that the settlement is the equivalent of much smaller monthly payments over the lifetime of the worker:

 

(6) For social security purposes only, as permitted by federal law or regulation, in an award of compensation as a lump sum or a partial lump sum under this chapter for permanent partial or permanent total disability, the court may make a finding of fact that the payment represents a payment to the individual to be distributed over the individual's lifetime based upon life expectancy as determined from mortality tables from Mississippi Code Annotated.

             The actual language that should be included is not set out by statute anywhere, so that it does not have to be word-for-word, but the following language is often used successfully in many cases:

 

After payment of the attorney’s fees and costs, the claimant will receive the net amount of  $____________.  The mortality tables set forth in Mississippi Regulation §84-105 indicates that because the Plaintiff is age ______, Plaintiff  has a life expectancy of ________ years or ______ months.  The amortized monthly benefit received by the Claimant is $_____________ divided by _________ months or $_____________ per month and represents a future income replacement.

 

This language has no effect on the amount of the workers’ compensation settlement itself; all it does is preserve Social Security benefits to the greatest extent possible.  Inclusion of the language can reduce, or sometimes eliminate, the offset.

The calculation over the lifetime of the worker will usually result in an equivalent monthly rate of workers' compensation payments that is much smaller than the temporary checks received by the worker.  This allows the Social Security Administration to subtract a much lower amount of monthly workers’ compensation benefits from the 80% maximum, thus allowing for greater Social Security disability benefits.  This method of calculation was first approved in Sciarotta v. Bowen , 837 F.2d 135 (3d Cir.1989), which was eventually adopted by the Social Security Administration.[6] 

The importance of the life expectancy language in the workers' compensation order is to give the Social Security Administration a basis to calculate how the lump sum is to be received.  By giving the Social Security Administration a new monthly figure with the life expectancy language, they will not use the default, which is to treat the lump sum as if temporary periodic workers' compensation benefits had continued.

Watch out for the pitfalls and exceptions:

 --Actual periodic payments will trump the language.

In any settlement order in which the worker receives the benefits in periodic payments, instead of in a lump sum fashion, Social Security will often ignore the life expectancy clause, at least for the time periodic payments are made.  Social Security first looks at the actual monthly benefits received by the worker, and only when the worker gets a lump sum do they calculate an equivalent monthly rate.  In other words, the life expectancy language will not be considered during any time that the client gets temporary checks.  If a lump sum is paid out over time in some form of a structured settlement, the language of the settlement must be very clear that the settlement is for a lump sum, and that the payments overtime are a structured pay-out of the lump sum, and are not continued periodic workers’ compensation benefits.

However, there is yet another exception to this exception.  Under Social Security Ruling (SSR) 81-32 if an injured worker has the choice to have the settlement paid in a lump sum or over time, and the settlement or order expressly states that the worker had the option, and chose to take the settlement in an annuity, it should be treated as a lump sum.  The ruling specifically explains:

 

It is the position of the Social Security Administration (SSA) that where the WC award gives the worker an option of receiving a cash lump-sum payment or having the employer or insurer purchase an annuity, the workers’ exercise of that option constitutes his or her receipt of the lump-sum or purchase price. Thus, a worker who chooses to receive a lump-sum amount is considered to have been paid that amount regardless of whether he or she uses it to purchase an annuity. Where the worker exercises an option to have the employer or insurer purchase an annuity, it is the purchase price of the annuity which he or she is considered to have been "paid" within the meaning of section 224(a) of the Act.

 

Therefore, if the settlement or order is clear that the worker chose to take an annuity in lieu of a lump sum, presumably the worker can still use the language in deeming the benefits payable over the lifetime of the worker.  However, I also suggest that many low-level SSA employees may get this issue confused and attempt to offset the amount of the annuity, and an attorney may have to explain this issue to SSA.

 

--The Social Security Administration will only recognize the language in an original order.


In the past, it was common for workers’ compensation attorneys to leave the language out of a settlement unless the injured worker was going to apply, or had already applied for Social Security disability.  If the injured worker later applied for Social Security disability, an attorney could have the workers’ compensation order amended to include the language.  THIS IS NOT ACCEPTABLE!

Currently, Social Security will recognize the life expectancy language if it is found in the original settlement.  Social Security has a policy to refuse to recognize the language if it is only found in an amendment to the settlement (i.e. in an agreed order to modify the decree).  On October 3, 1997, the Commissioner issued a ruling, SSR 97-3,  1997 WL 620432, stating that the Defendant would not recognize the life-expectancy language if it were contained in an amended workers’ compensation settlement.[7] 

 --It does not matter if the workers’ compensation injury is related to the person’s disability.

 The Social Security rules do not differentiate between work-related and non-work-related injuries, but rather considers all impairments in combination.  The offset rules set the maximum combined benefits at 80% no matter what injury the workers’ compensation benefits were paid for.  For that reason, even if an injured worker gets workers’ compensation benefits for a relatively minor injury, that could never possibly cause a person to be totally disabled, the language should still be put in the settlement.  For example, a worker who settles a carpel tunnel workers’ compensation case for $20,000 could suffer a heart attack or be involved an a catastrophic auto accident, and become totally disabled.  If the language is not in the workers’ compensation settlement order, then she could still risk losing benefits

Conclusion

There is no good reason not to include the Social Security language in a workers’ compensation settlement order.  The language does not cost the employer or workers’ compensation carrier anything, but its absence can cost the injured worker thousands in Social Security benefits.

The Social Security policy, to refuse to recognize an amended order, and to only recognize the language in an original order, was put in place years ago.  Attorneys who represent injured workers in workers’ compensation cases can cost their client thousands of dollars and put themselves at risk of malpractice if they fail to put the language in the settlement.

 



[1] 42 U.S.C. §  424a. Reduction of disability benefits:

(a) Conditions for reduction;  computation

 If for any month prior to the month in which an individual attains the age of 65--

  (1) such individual is entitled to benefits under section 423 of this title, and

  (2) such individual is entitled for such month to--

   (A) periodic benefits on account of his or her total or partial disability  (whether or not permanent) under a workmen's compensation law or plan of the United States or a State, or

   (B) periodic benefits on account of his or her total or partial disability  (whether or not permanent) under any other law or plan of the United States, a State, a political subdivision (as that term is used in section 418(b)(2) of this title), or an instrumentality of two or more States (as that term is used in section 418(g) of this title), other than (i) benefits payable under Title 38, (ii) benefits payable under a program of assistance which is based on need, (iii) benefits based on service all or substantially all of which was included under an agreement entered into by a State and the Commissioner of Social Security under section 418 of this title, and (iv) benefits under a law or plan of the United States based on service all or substantially all of which is employment as defined in section 410 of this title,

  the total of his benefits under section 423 of this title for such month and of any benefits under section 402 of this title for such month based on his wages and self-employment income shall be reduced (but not below zero) by the amount by which the sum of--

  (3) such total of benefits under sections 423 and 402 of this title for such  month, and

  (4) such periodic benefits payable (and actually paid) for such month to such individual under such laws or plans,

exceeds the higher of--

  (5) 80 per centum of his "average current earnings", or

  (6) the total of such individual's disability insurance benefits under section 423 of this title for such month and of any monthly insurance benefits under section 402 of this title for such month based on his wages and self- employment income, prior to reduction under this section.. .

See also 20 C.F.R. §404.408.

[2] Social Security uses several formulas to determine the past wage.  The most common, called the “high five” approach, uses the last five years before the year of injury, plus the year of injury itself; whichever year is the highest will be used in the formula (the maximum benefit will be 80% of the highest year). The highest year’s income, divided by 12 and multiplied by .8, is the maximum monthly benefit.   The alternative method used by Social Security is to look for the highest five consecutive years, add them together and divide by 60 to determine the monthly income amount (this amount times .8 is the maximum allowable combined benefit). .

[3] i.e. if the injured worker received weekly checks, that amount is multiplied by 52 and divided by 12, bi-weekly checks are multiplied by 26 and divided by 12.  Since Social security Benefits are paid monthly, all worker’s compensation benefits are converted into an equivalent monthly rate.

[4] In Mississippi, in order to comply with the Federal cap, the disabled person’s Social Security benefits are reduced; Mississippi is a “traditional” offset state.  Other states, such as Florida and Ohio are “reverse” offset states, in which the full Social Security benefits are paid, and the employer/worker’s compensation insurance carrier is allowed to reduce the worker’s compensation benefits paid to keep the injured worker under the cap.

[5] Because the Social Security Administration pays monthly benefits, they would convert 100 weeks into months by dividing 100 weeks by 52 weeks and then multiplying that number by 12 months so that the offset would be applied over 23 months.   If the client’s highest pre-injury wage were $2000 per month, then the 80% maximum he could collect in total of worker’s compensation and Social Security benefits is 1600.  In this example, the $40,000 is applied over 23 months, or $1739.13 per month, so that the injured worker would get no Social Security benefits for the 23 months to which the offset applies. 

            By Comparison, if the worker were 40 years old at the time of the settlement, and her life expectancy, according to the Mississippi Code Annotated were to age 80 (40 more years), then the worker’s compensation benefits would $1000 per year, or $83.33 per month. 

For a worker with a hypothetical benefit amount of $750 per month in Social Security the cost for failing to put the language in the order would be $17,250 in lost Social Security benefits for the disabled worker.  In other words, in this example, if the worker’s attorney left the language out, the attorney cost his client $17,250. 

With the language in the order, the worker would be deemed to receive only $83.33 in worker’s compensation benefits.  Because the combined Social Security disability benefit ($750 per month) and the deemed worker’s compensation benefits ($83.33) total of $833.33 is less than $1600 (the 80% maximum) the worker’s total benefits are below the cap and she would be paid her full Social Security benefits, with no offset.

[6] Recognizing pro-ration over a claimant’s lifetime is acknowledged implicitly in the Social Security Act and explicitly in the Agency’s Program Operations Manual System.  42 U.S.C. § 424a(b); POMS § DI 52001.555.

 

[7] In 1997 the Commissioner of Social Security originally proposed a change in the regulations that would not recognize pro-ration language in worker’s compensation orders at all. 62 FR 46682, September 4, 1997.  However, after receiving over 1400 comments during the notice-and-comment period, the Commissioner never enacted that regulation, and, withdrew the proposed regulation on February 11, 1999.  64 FR 6824.