Understanding how Social Security Disability Insurance works when you receive (or plan on receiving) a lump sum settlement can save you a lot of hassle and stress.
Following are some commonly asked questions on the topic along with helpful answers to enable you to make smart financial decisions?
Will I lose my SS Disability Insurance if I get a settlement or win a lawsuit?
You won’t automatically lose your Social Security Disability Insurance upon receiving a settlement. In fact, up to 17% of all SSDI recipients have a connection to either workers’ compensation or public disability benefits. However, the amount you receive from SSDI could be lowered due to receiving a settlement or winning a lawsuit, in some cases significantly so.
How does a lump sum settlement affect Social Security Disability Insurance?
Social Security Disability Insurance doesn’t cover more than 80% of a person’s typical earnings before he or she became disabled due to an illness or injury. If you receive a lump sum settlement, SSDI will usually prorate the settlement, dividing the money you receive from the settlement by the number of months you are expected to be on SSDI; that is, until you are able to go back to work or you reach retirement age, at which point SSDI payments automatically switch to a Social Security retirement payment and SSDI offset rules no longer apply.
In some states, the lump-sum payment a person receives when on SSDI is reduced to ensure a person is not receiving more than 80% of his or her former salary. This means that a person who is receiving the full 80% of his or her former salary will receive money from a lump sum worker’s compensation settlement; however, those who are receiving less than 80% of their former salary will receive some settlement money. Once again, this only applies to individuals under the age of 62; those of retirement age receive retirement payments and so will receive the full 100% of their lump sum payment without a reduction to their monthly SS payments.
Following are two examples that clarify the rules.
Clarissa earned $5,000 a month before becoming permanently disabled due to an on-the-job accident. She began to receive Social Security Disability Insurance on her sixtieth birthday and currently receives $4,000 a month in payments, which is 80% of her former salary. She then received a lump-sum settlement of $10,000 from her employer one year later (on her sixty-first birthday). The $10,000 is then divided by twelve (as it is only twelve months before she turns 62, which is retirement age), which comes to about $833 a month. This sum is subtracted from her SSDI payments for the coming year, which means she will only receive about $3,267 a month from SSDI.
Tony, on the other hand, is 42 years old. He used to earn $10,000 a month but became ill and now only receives $5,000 in monthly SSDI payments. This comes to 50% of his former income. If it is determined that Tony’s employer is partly responsible for Tony’s illness and Tony receives a $1,000,000 lump sum settlement, this is divided by 240 months (the number of months until Tony turns 62). Tony would receive the equivalent of $4,166 a month but because he is on SSDI, the state only pays out the equivalent of $3,000 a month to cover up to 80% of Tony’s former salary. Put simply, this means he would only see $720,000 of his settlement money.
What income affects Social Security disability benefits?
Not all payments affect Social Security disability benefits. Some payments that aren’t covered by Social Security’s offset rules include:
- Veterans Affairs benefits
- Needs-based benefits
- Federal, state, or local disability benefits based on employment covered by Social Security
- Private pensions
- Private insurance benefits
- Supplemental Security income
Can You Receive Social Security Disability and Workers’ Compensation at The Same Time?
You can receive Social Security disability and lump-sum or monthly workers’ comp payments at the same time. However, the workers’ compensation payments are subject to the rules outlined above, and in some states you may not receive any workers’ compensation payments if you already receive 80% of your former salary via SSDI benefits.
How can I minimize the offset amount?
There are some things you can do to minimize the offset amount of a lump-sum settlement or lawsuit payment:
- You can have the money paid as an annuity instead of all at once. Put simply, this means you’ll receive a set amount of money per year rather than the entire sum in one sitting. This option may work well for people who are close to retirement age and/or are not receiving the full 80% benefit from SSDI.
- You can have the settlement or lawsuit payment deferred so you start receiving an annuity at a future date instead of right now. This is ideal for anyone who receives 80% of his or her former salary from SSDI but still wants the full lump-sum payment from the lawsuit or settlement. By deferring payment until retirement age, a person can receive both SSDI and the full settlement/lawsuit payment.
These options have their flaws, and may not be suitable for everyone. Talk to a lawyer about your options to ensure your financial decisions meet your current and future financial needs.
Are there exclusions for certain expenses?
Any medical and legal expenses you incur in connection with receiving workers’ compensation can be excluded when Social Security (or your state) decides on how much money you’ll receive in monthly payments. Let’s take a look at a couple of examples:
Mary, who is 60 years old, earned $10,000 a month but lost her job due to an on-the-job injury. She receives $4,000 in SSDI payments and was awarded $200,000 in a recent lawsuit. This sum divided between 24 months would come to about $8,333 a month, but Mary would only be eligible for an extra $4,000 a month due to SSDI rules. However, if she has to pay about $5,000 a month in medical expenses, she would receive the full benefit with no exclusions as she would only be getting an extra $3,333 a month after medical expenses are covered.
Tony is 40 years old. He used to earn $10,000 a month but got sick due to exposure to chemicals at work and is now unemployed, receiving only $5,000 a month from SSDI. He won a lawsuit against his former employer and received $1 million on compensation but has to pay 25% of this money ($250,000) to his personal injury lawyer. What’s more, his medical expenses will be about $5,000 a month for the next 10 years. This comes to $600,000 in personal medical bills. These expenses are deducted from his lump-sum payment before Social Security calculates how much money Tony would get from his settlement. He only has $150,000 after qualifying expenses, which comes to about $568 a month for the next 22 years until Tony reaches retirement age. Thus, Tony would receive his full lump-sum payment as it does not exceed 80% of his former income once expenses are calculated into the equation.
How can I calculate average current earnings?
There are three ways in which average current earnings (ACE) can be calculated:
- Your average monthly earnings from the work or business you engaged in the year before you became disabled. To calculate this, add up your annual income and divide it by twelve.
- Average your monthly earnings from the five years in which you earned the most income before you became disabled. To calculate this, add up the annual income from these five years and divide it by sixty.
- Go over your income from the last five years before you became disabled, find the year in which you earned the most money, and divide that year’s income by twelve.
Naturally, you’ll get different answers from each of these calculations. The number that is the highest is the one that Social Security will use to calculate your SSDI payments.
A lump-sum payment from a settlement or a lawsuit payment can be a huge boon to anyone on SSDI; however, it’s important to be aware that you may not see much or even any of this money if you don’t have a financial plan in place to ensure your SSDI income isn’t offset by too much as a result of your new source of income.
If you have received a lump-sum payment or expect to receive one in the near future, consider the information outlined above and seek legal or expert help if need be in order to keep as much of your lump-sum payment as possible, without lowering your SSDI income.