Avoiding Social Security Offsets in Workers’ Compensation Settlements
Despite a number of seminar presentations which have discussed the question of how to draft a workers’ compensation settlement contract so as to avoid possible offsets of the petitioner’s Social Security disability benefits, I am still seeing a number of clients who come in regarding Social Security disability applications whose workers’ compensation settlements made no attempt to do this. I have heard of some instances in which workers’ compensation attorneys have been sued for malpractice in these situations and believe that a reminder on this topic is in order.
To provide some background for anyone who is not already familiar with this issue, the Social Security Act provides that if a claimant for disability benefits receives “periodic payments” under any state workers’ compensation law, the receipt of monthly disability benefits under the Social Security Act will be reduced according to a set formula (which is explained further below). The “periodic payments” mentioned in the Social Security Act includes lump sum settlements which can be reduced to weekly payment amounts.
As all workers’ compensation practitioners know, virtually all lump sum settlements entered into under the Workers’ Compensation Act represent a certain number of weeks compensation. This is true whether the settlement is made under a scheduled loss or under the man as a whole provisions of section 8 (d)-2. Therefore, a settlement of “40% loss of the man as a whole” will correspond to 200 weeks of compensation payments. This will be treated by the Social Security Administration as a series of periodic payments for 200 weeks (or 46 months) and the offset calculation will be done for that period of time, thereby reducing the client’s benefits.
The actual offset calculation is done by taking the highest earnings year in the past five years before the onset of the disability and determining corresponding monthly wage. The combination of the disability benefits paid and sum of periodic workers’ compensation benefits cannot exceed 80 percent of that figure. To the extent that the average monthly wage figure is exceeded, the Social Security benefits are reduced.
To give an example, assume that the highest yearly wage earned in the five years preceding the last day worked was $24,000. When divided by 12 months a monthly figure of $2,000 is obtained. Multiplying that by .80 gives a maximum monthly payment of $1,600. At $24,000 the average weekly wage is $461.53. The TTD rate would therefore be $307.66 and the PPD rate would be $276.92.
If the TTD payments were paid at the appropriate time, there is nothing that can be done to avoid an offset for those payments. If however, there was a dispute as to liability and TTD is being included in final settlement, the offset can be avoided or minimized by specifying that only the first five months (20 weeks) of the settlement is for TTD since no Social Security benefits are payable until the fifth month after the onset of the disability. The actual dates of TTD should also be specified in this situation.
Let us assume further that the workers’ compensation case is being settled for the 40 percent man as a whole figure discussed above, or $55,384. What can be done to avoid the offset now?
The easiest method is to use the so called “spread” approach. This will work best on younger petitioners. Assume that the petitioner in the above example is 55 years old at the time of the settlement of the claim. He or she therefore has 10 years, or 520 weeks, before reaching retirement age of 65. Therefore, the settlement can be expressed as representing a payment of $106.50 per week for 520 weeks. This computes to only $426 per month.
If we assume that the client would be eligible for the maximum monthly Social Security benefit (approximately $1000 currently) he or she would be “receiving” $1,426 per month of combined benefits which is under the $1,600 allowed. No offset would occur.
Where the petitioner is older and/or the amount of settlement is large, a spread approach to age 65 may not be sufficient to avoid an offset. In that event, allocating some portion of the settlement for future medical expenses and vocational rehabilitation can be attempted. This, however, is closely scrutinized by Social Security and any such future medical or vocational expense must be documented at the time of settlement and preferably attached to the settlement contracts. The age of 75, or some other documental life expectancy can also be attempted but has been disallowed by the federal court in at least one reported case.
Failure to attempt to structure the settlement can result in considerable economic loss to the client. In the above example, failure to utilize the structured settlement language would cost this hypothetical client over $23,000 during the 46 month period in which the offset would be applied by the Social Security Administration ($276.92 x 4 = $1107.68. Subtracted from $1,600 leaves only $492.32 payable instead of $1,000, or a loss of $507.68 x 46 months = $23,353.28).
In my opinion, the workers’ compensation practitioner should consider possible Social Security offsets not only when the client has actually been awarded disability benefits by the Social Security Administration prior to the settlement of the workers’ compensation case, but also whenever the client has a sufficiently serious injury that he or she may become unable to work and become eligible for disability payments before the number of weeks represented by the settlement will elapse. Clients who are over the age of 50 or who have mental problems may be awarded disability benefits by the Social Security Administration even though they are not candidates for permanent total consideration by the Industrial Commission. It is recommended that the workers’ compensation attorney consult with an experienced Social Security practitioner before entering into settlement in such situations.