Workers Compensation Offset & Social Security Disability

If you receive Workers Compensation when you also qualify for Social Security Disability (SSD) in Pennsylvania, your SSD award may be subject to Workers Compensation offset. Basically, your SSD could be reduced as a result.

A few points should be noted at the start. First, Supplemental Security Income (SSI) and Social Security retirement benefits are not subject to an offset generally. For example, SSI is affected in the usual manner: Workers Compensation is considered unearned income so, after the first $20 is this income is deducted, the rest reduces SSI dollar for dollar.

Second, Pennsylvania applies the Workers Compensation offset in the same way that all but approximately 14 other states do. These other states reduce the Workers Compensation award that is paid to someone receiving SSD. This only is possible if a state’s Worker Compensation law required this type of reduction under its law prior to February 18, 1981. For the purpose of this article, we will review the majority approach, specifically as Pennsylvania applies it. Also, since this is an introduction to the concept of offset, it will focus on a disabled individual without discussing this concept’s application when dependents also receive payments due to the disabled worker’s earnings record. Section 504 of the Social Security Handbook can be reviewed for its look at family benefits and additional details about concepts introduced here.

Workers Compensation Offset for a Disabled Individual

The standard rule is the total received in Workers Compensation and SSD cannot be more than 80 percent of the amount that you earned when fully employed. This amount officially is known as the “applicable limit.” To ensure that this is the maximum amount received, the Social Security Administration reduces your SSD income by the amount lowers the sum of these two payments by the necessary amount so that the maximum percentage is not exceeded. The reduction in your Social Security Disability is what is called the Workers Compensation offset.

The idea may not sound complicated, but the limit of 80 percent of your previous income level has to be defined and calculated. At this point, the idea is not as straightforward as the general rule might make it seem. The Social Security Administration calculates the maximum amount of combined benefits permitted by federal law so that it can reduce the SSD paid in a given month to keep this amount from exceeding the maximum. The impact of the Workers Compensation offset actually impacts people who earned less income because their benefits will be closer to the income that they earned while higher earners have a larger gap between earnings and the sum of the benefits that they possibly can receive.

Average Current Earnings & Workers Compensation Offset

When it comes to calculating the income that is used to determine if there will be a Workers Compensation offset, the SSA actually uses three methods of calculation to find your pre-injury income (which is called your “average current earnings”), which is the starting point in this process. Your “average current earnings” will be the highest income level produced by three methods of calculation.

The first calculation by Social Security is the average monthly wage – the “unindexed Primary Insurance Amount” – on which your Social Security Disability benefit is based. Then, there is the “high 5” calculation, which is the five consecutive years that add up to your earnings for this length of time; average monthly earnings are determined based on this amount. Finally, the average monthly earnings for either the calendar year in which you became disabled or any of the five calendar years prior to that is calculated – this result is known as the “high one.” Whichever of the three calculated amounts of average current earnings is highest will be used for the next step in finding the Workers Compensation offset. The “high one” tends to result in the highest value and ends up being the amount used.

Determining the Workers Compensation Offset

Next, the SSA uses its determination of your average current earnings and calculates 80 percent of it to set the combined dollar limit for your monthly SSD award plus your Workers Compensation amount. The Social Security Disability income will be reduced by the necessary amount to keep the total amount of benefits that you receive from exceeding the maximum. Potentially, your SSD could continue to be subject to the Workers Compensation offset until you reach full retirement age, at which point the SSA replaces your SSD with Social Security retirement benefits.

Monthly benefits are not the only category that can be affected under the federal law. Often, people receiving Workers Compensation will trade monthly payments for a lump sum. If this occurs, you would not avoid facing the Workers Compensation offset, but, since your regular SSD payments are received on a monthly basis, the Social Security Administration must alter the way that it handles the calculation of the average current earnings.

Adjustments Required for Payment of a Lump Sum

The general principle involves dividing this lump sum by the amount of Workers Compensation that you were getting each month. The possible reduction of SSD benefits focuses on the monthly amount that was being received by viewing its receipt as continuing for the number of months that is the result of this formula. To attempt to minimize the impact of the offset when a lump-sum settlement has been reached, a person might agree an amount replacing a lower Workers Compensation amount that would have been received monthly until the individual would reach Social Security’s retirement age (e.g., age 65 currently) so that the average current earnings that could trigger the offset are reduced.

An additional consideration is that the SSA may exclude medical and legal benefits that are part of the lump sum. If these amounts are subtracted out of the settlement, the reduced Workers Compensation settlement will yield fewer months for the offset potentially to be in effect after this total is divided by monthly amount currently being paid. However, you need to realize that the Social Security Administration may want to see the documentation of such a settlement before its acceptance.

In practice, the Workers Compensation offset has numerous potential pitfalls, and you have to be aware of these when you receive Social Security Disability benefits. If you take a chance without being sure that you have the implications explained to you by someone whom you trust, you may cost yourself some income to which you would have been entitled if you had understood the concepts that apply as well as how they apply to your situation.