Does a Workers Comp Settlement Affect Social Security Retirement?

A workers’ compensation settlement can impact Social Security retirement benefits. While both programs provide financial support, their interaction can lead to adjustments. Understanding how these systems intersect is valuable for anyone navigating a workers’ compensation settlement alongside Social Security planning.

Understanding the Workers’ Compensation Offset

The Social Security Administration (SSA) implements a rule known as the workers’ compensation offset. This measure is designed to prevent individuals from receiving total combined benefits from workers’ compensation and Social Security that surpass a certain percentage of their earnings before the injury or illness occurred. The rationale is to ensure total public benefits do not exceed pre-injury income levels, which could otherwise reduce incentives to return to work.

This offset primarily applies when a person receives Social Security and workers’ compensation benefits concurrently. While most commonly associated with Social Security Disability Insurance (SSDI) benefits, its principles can extend to Social Security retirement benefits in certain situations, particularly if retirement benefits are claimed early or an individual transitioned from disability benefits. The SSA aims to cap the combined benefit amount at 80% of an individual’s “average current earnings” (ACE) prior to the onset of their disability or injury. Should the combined payments exceed this 80% threshold, the Social Security benefit amount is reduced to bring the total within the allowable limit.

Determining the Social Security Reduction

The process for calculating any potential Social Security reduction involves specific steps, beginning with the determination of your “average current earnings” (ACE). The SSA calculates ACE using the highest of three methods: your average monthly wage for the year your disability began, your average monthly earnings from covered employment during your highest five consecutive years after 1950, or your average monthly earnings based on your single calendar year of highest earnings. This ACE figure establishes the 80% limit for combined benefits.

A workers’ compensation settlement, especially a lump sum, is then factored into this calculation. For offset purposes, the SSA prorates a lump-sum settlement over time, treating it as if it were ongoing monthly payments. This proration can be based on the rate of previous periodic workers’ compensation payments, or, if specified in the settlement agreement, it can be spread out over a longer period, such as the individual’s life expectancy. Including language in the settlement agreement that specifies how the lump sum should be amortized can significantly influence the monthly amount attributed to workers’ compensation by the SSA.

Certain components of a workers’ compensation settlement can be excluded from the amount used in the offset calculation. Medical expenses, whether for past treatment, current needs, or future care, are excluded if they are clearly itemized in the settlement agreement. Attorney fees incurred by the worker in connection with the workers’ compensation claim can also be excluded from the amount subject to offset, provided these fees are consistent with state law and documented. The exclusion of these specific costs helps reduce the overall workers’ compensation amount that the SSA considers when applying the offset, potentially leading to a smaller reduction in Social Security benefits.

Some states have what is known as a “reverse offset” provision. In these states, the workers’ compensation benefits are reduced to account for Social Security benefits, rather than the other way around. However, the federal offset rules apply unless a state’s reverse offset law was in effect prior to February 18, 1981.

Reporting Your Settlement to Social Security

When you receive a workers’ compensation settlement, inform the Social Security Administration promptly. Failing to report this change can lead to an overpayment of Social Security benefits, which the SSA will require you to repay. Reporting ensures that your benefits are calculated accurately and helps avoid future financial complications.

You will need to provide specific documentation to the SSA. This includes a copy of the workers’ compensation settlement agreement, which should detail the components of the settlement, such as the total amount, any breakdown for medical expenses, and attorney fees. The SSA will also need information regarding the date of your injury, the type of payments received (e.g., temporary total, lump sum), the payment amounts, and the period covered by any lump sum.

To report your settlement, you can contact the SSA directly by phone, mail, or by visiting your local Social Security office. While some routine changes can be reported online, a workers’ compensation settlement requires submitting detailed documents that are best handled through a direct submission or in-person visit. After reporting, the SSA will review the information and may adjust your Social Security benefits to comply with federal offset rules. Maintaining clear records of all submitted documents is a good practice.