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If you receive both workers’ compensation and Social Security Disability, you will probably not receive the full amount of both. The offset is the mechanism that reduces one because of the other.
The rationale is that disability benefits should replace a substantial portion of lost earnings, not exceed what you were earning before.
The part that catches people out is that a lump-sum settlement does not escape it — and how the settlement is worded materially affects the size of the reduction.
Federal law generally limits combined SSDI and workers’ compensation to about 80% of your average current earnings before the disability.
Where the combination exceeds that ceiling, Social Security reduces the SSDI payment to bring the total down. Workers’ compensation is generally not the benefit that gets reduced.
The calculation uses your prior earnings, so it varies considerably from person to person. Higher prior earnings mean more headroom before the offset bites.
A common misconception is that settling comp as a lump sum sidesteps the offset. It does not.
Social Security generally converts the lump sum into a notional monthly rate — amortising it — and applies the offset as though you were receiving that amount monthly.
How that amortisation is calculated depends heavily on the settlement language, which is where planning matters.
Settlement agreements can include language spreading the settlement over your expected lifetime, which reduces the notional monthly rate and therefore the offset.
Amounts properly allocated to medical expenses, attorney fees and case costs may be excluded from the offset calculation entirely.
This must be addressed in the settlement document. It is extremely difficult to fix afterwards, which is why the language deserves scrutiny even when the number is agreed. It sits alongside any Medicare set-aside consideration.
Workers’ compensation is generally not taxable. But the portion of comp that causes an SSDI reduction can become taxable to the same extent the SSDI would have been.
In effect, the offset can convert some otherwise tax-free money into potentially taxable income.
Most people never reach the income thresholds where SSDI becomes taxable, but anyone drawing both benefits should flag it to whoever prepares their return.
It can. Where combined benefits exceed roughly 80% of your prior average earnings, Social Security reduces the SSDI payment to bring the total back under that ceiling.
No. Social Security generally amortises the lump sum into a notional monthly amount and applies the offset accordingly. How that is calculated depends significantly on the settlement wording.
Often, through settlement language spreading the amount over your expected lifetime or properly allocating portions to medical expenses and case costs. It has to be built into the settlement document.
It can. The portion of workers’ comp that triggers the SSDI reduction may be taxable to the same extent the SSDI would have been, even though comp is normally tax-free.
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