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How does a workers' compensation settlement affect Social Security Disability Insurance payments?

While you can receive Social Security Disability Insurance benefits and workers’ compensation for the same disability, the amount of workers’ compensation can reduce your SSDI. That's true whether you are getting workers’ comp in installments or as a lump-sum settlement.

In a lump-sum settlement, you agree to give up certain rights so that you can receive a onetime payment, instead of collecting your benefit award over time. There are a number of reasons you might do this.

For example, if a claim is in dispute, you may want to avoid the time and stress of an administrative hearing or court case and a possible adverse ruling. Or your employer's insurance company may offer to pay now if you waive future compensation for medical expenses arising from your workplace injury — potentially a good deal if you (and your doctor) don't expect the costs to be significant.

Like regular workers’ comp payments, the lump-sum amount is subject to an offset — a reduction of one benefit to meet the federal requirement that workers’ comp and SSDI payments combined be no more than 80 percent of your typical earnings before you became disabled. (In most states, SSDI is cut by the amount necessary to reach the 80 percent cap, but in certain states it's the workers’ comp that is reduced.)

When you are getting workers’ comp in periodic payments, Social Security adds them to your SSDI to determine the amount of the offset. To figure out the effect of a lump-sum settlement, Social Security prorates the settlement amount to reflect what you would have received in workers’ comp per month were you not getting the lump sum, and it uses that figure to calculate the offset.

Sometimes the offset rate is specified in the language of the lump-sum settlement, based on the worker's projected life expectancy. If not (or if Social Security determines that the specified rate is unreasonable), the agency will use other methods to calculate the figure. For example, the rate could be based on your periodic workers’ comp payment before the settlement, if you were getting one; on your wages before you became ill or injured; or on the legally set maximum workers’ comp rate in your state.

The offset continues until the prorated “payments” reach the settlement amount or you reach full retirement age, at which point your disability benefit switches to a retirement benefit and the offset no longer applies.

Keep in mind

  • When you apply for SSDI benefits, you must disclose information about any workers’ compensation claim you have filed and document any payments that you've already received, including a negotiated lump-sum settlement.
  • Legal or medical expenses you incur in pursuing a workers’ compensation claim may be considered “excludable,” meaning Social Security will deduct them from the settlement amount before computing your offset.

Published March 25, 2021

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