Workers’ compensation settlements may cause a reduction in social security disability insurance (SSDI) benefits. However, this will only take place when a person’s workers’ compensation settlement and SSDI payments combine to form a total that’s higher than 80% of the person’s average current earnings (ACE) prior to collecting disability. In some states (not in Iowa), […]

how does a workers comp settlement affect social security disability

Workers' compensation settlements may cause a reduction in social security disability insurance (SSDI) benefits. However, this will only take place when a person's workers' compensation settlement and SSDI payments combine to form a total that's higher than 80% of the person's average current earnings (ACE) prior to collecting disability. In some states (not in Iowa), a person may receive reduced workers' compensation payments as opposed to reduced SSDI benefits.

To understand more about how workers' compensation affects SSDI payments and vice versa, it's important to know how each works.

How Workers' Compensation Works

Workers' compensation is a system that provides workers with benefits if they sustain work-related injuries or illnesses. These benefits help cover medical care and lost wages to an extent based on the nature of the damages sustained and the initial accident. If workers suffer from lasting physical damage after healing from injuries, they may qualify to receive permanent disability benefits.

Prior to the introduction of workers' compensation laws, workers could only file a tort suit against employers that would require them to prove that their employer's negligence was directly responsible for the injuries sustained. In these cases, workers frequently never recovered compensation, while individuals who managed to recover damages often needed to pay large costs and saw delays in receiving compensation. The implementation of workers' comp changed this, enabling injured workers to quickly recover compensation regardless of who was at fault. Employers also benefited from the introduction of workers' comp, as they saw limited liability and employees waived their right to sue employers.

Each state is responsible for administering workers' compensation programs, which vary depending on a number of factors. For example, programs may depend on the types of illnesses or injuries experienced, permissions around providing insurance, and benefits that employees receive. Iowa has a very good system that provides some of the better benefits in the country.

The Length of Workers' Comp Benefits in Iowa

Injured employees may wonder how long their benefits will last in Iowa after a work-related accident. So, how long do workers' compensation benefits last in Iowa, exactly? 

According to Iowa law, employees can receive weekly workers' compensation benefits until they return to work or up to 30 days after the employer indicates that benefits will end. In some cases, workers may be able to reinstate their benefits. These benefits are referred to as healing period benefits or temporary total disability benefits.

If a worker receives notice from their employer that benefits will soon end, the employer must provide an explanation along with details about how individuals can file claims with the Workers' Compensation Commissioner. 

Eligibility for Permanent Disability Benefits

In addition to workers' compensation benefits, disabled workers can in some instances receive Medicare and federal Social Security Disability Insurance to cover medical expenses and lost earning capacity.

There are key differences between workers' compensation and permanent disability to keep in mind. Although workers qualify for workers' compensation benefits starting with their first day on the job, the only individuals who qualify for SSDI are those with a long work history. 

Workers' compensation benefits cover short- and long-term disabilities along with partial or total disabilities, all of which the employee must have sustained due to work-related incidents. Meanwhile, the government only pays SSDI benefits to employees who have long-term disabilities that limit their ability to work, regardless of whether the disability developed due to a work-related incident.

Individuals only qualify for SSDI benefits if they are unable to earn gainful employment due to a physical or mental disability that's expected to last a year or longer or result in the person's death. Additionally, the disability must be severe enough to prevent the worker from performing the type of work they did pre-disability along with any other type of gainful activity. 

Generally, SSDI benefits start following a five-month waiting period.

Determining Permanent Disability

The specific rules for determining permanent disability depending on the state. Typically, doctors will indicate whether patients have a lasting medical condition or loss of function known as an impairment that resulted from a job-related injury or illness.

In addition to a doctor's statement and diagnosis, insurance companies may also want the individual to undergo an independent medical examination (IME) to determine how injuries or illnesses have impaired them. Individuals may also request an IME if they would like a second medical opinion if they disagree with their doctor's assessment. In Iowa, under most circumstances, an employee can obtain an IME at the employers expense.

In most cases, this process will end with the individual receiving a permanent disability rating in the form of a percentage. It's important to keep in mind that individuals don't necessarily need to prove that they're entirely unable to work to receive total permanent disability benefits. For example, some workers who lost multiple limbs or other body parts may qualify if these injuries severely impact their ability to work. Individuals may also qualify if they sustained injuries that collectively account for a 100% disability rating.

How a Workers' Compensation Settlement Affects SSDI Payments

Today, individuals may have their disability benefits reduced if they're receiving workers' compensation benefits at the same time. This concept known as offset was originally included in the 1956 Social Security disability program. The government then eliminated it in 1958 only to reinstitute it in the 1965 Social Security Amendments

The goal of introducing this offset was to make sure that the total amount of workers' comp and SSDI benefits doesn't go over 80% of an employee's current average earnings. However, the combined payments following the reduction must not be less than the amount of SSDI benefits prior to the reduction. 

The definition of average current earnings is as any of the following:

  • The highest average monthly wage that the unindexed disability primary insurance amount takes into account.
  • The highest average monthly earnings during the calendar year of the highest earnings received during covered employment over the five years ending with the year when disability payments started.
  • The highest of the monthly earnings received via covered employment or self-employment over the last five years.

Specifically, the offset of SSDI benefits applies to workers with disabilities who are under the age of 65, along with their families. Prior to the application of the offset to the worker's benefits, the offset will apply to benefits for dependent children or spouses. 

How to Minimize Offset for SSDI Benefits

Rules pertaining to SSDI benefits and workers' compensation offset enable workers to minimize the amount of payments that the government may reduce. The following are some of the ways in which workers may be able to maximize the amount of benefits they'll be able to receive.

Expense Exclusions

Prior to calculating a gross workers' compensation settlement total, SSDI will deduct any legal fees, rehabilitation costs, and dependent payments. In addition, the government will exclude any past or future medical expenses, except for those that fall under Medicare payments. Social Security will then request documentation of the different expenses that individuals would like to deduct from their workers' compensation settlement. This is why it's important for employees to maintain these documents as well as they can.

If Medicare covers an employee and the worker uses a large amount of workers' comp payments to help cover future medical expenses, Medicare may cease payment until those funds are spent.

Converting a Lump-Sum Settlement into Multiple Payments

When an individual receives a lump-sum workers' compensation settlement, workers can reduce the offset of SSDI benefits by stating that they intend to spread this payment out to ensure it lasts for the rest of the individual's life. Doing so may not only significantly reduce the offset but may eliminate it.

For instance, if a 50-year-old worker receives a total of $20,000 via workers' compensation, and the individual is expected to live for another 35 years, SSDI may divide the amount by the number of months (420) to determine how much to pay every month. While the worker still receives the payment in the form of a lump sum, Social Security would consider the amount as a total of 420 months of payment.

If the worker also gets $1,500 in SSDI payments, totaling $1,976 per month, the benefits wouldn't be offset unless the total accounted for 80% of the recipient's average current earnings.

Individuals will need to include an "amortization provision" in their workers' comp settlement agreement to qualify for consideration of a lump sum as monthly payments. This provision must appear in the original settlement documents, as adding them to a current settlement is strictly prohibited and Social Security will consider this an attempt to avoid offset.

Certain federal circuits have ruled that worker's compensation settlements are only applicable to a person's working life as opposed to their entire life. Some attorneys may attempt to bypass this restriction by drafting settlement documents to show that the workers' comp settlement amount is pro-rated until the date when the recipient reaches the age of full retirement. Attorneys may also use the workers' comp settlement's annuities.

Workers' shouldn't confuse lump-sum settlements with the payments made to cover past-due benefits. Through settlement agreements, claimants waive the liability of insurance companies or employers for future workers' comp benefits and medical expenses in exchange for a lump sum or another type of cash settlement.

If a case winds up going to trial, the decision that the judge makes pertaining to a worker's case won't involve lifetime amortization. Instead, individuals will have the permanent disability rating as detailed in the award, which will keep them from using amortization to prevent the offset of Social Security benefits.

Opting for Social Security Retirement Benefits

If an individual receives Social Security retirement benefits, the workers' compensation offset won't apply. If a person is nearing the age of 62 and wants to avoid the offset of workers' comp, they should consider filing for early retirement. It's worth noting that retiring early will lead to a reduced monthly Social Security payment, which is why it's often best to consult with a workers' compensation lawyer or the person's local Social Security offices to determine if it's best to retire early.

Understanding how a workers' compensation settlement may affect Social Security Disability payments can help determine which steps to take to minimize or eliminate the offset of benefits. As a result, individuals can increase their chances of maximizing their workers' compensation and SSDI benefits to receive full coverage.

Photo of Niko Pothitakis
For the past 15 years Mr. Pothitakis has focused his practice on Workers Compensation and Personal Injury Cases. The firm has two locations, one being in Burlington, Iowa and the other in Keokuk, Iowa. Mr. Pothitakis works with many area unions and employee organizations to provide advice, assistance, and guidance as it relates to employment issues. Mr. Pothitakis provides free consultations to those with legal questions in the firm's areas of practice. In this initial meeting or conference potential clients are provided advice on their need for assistance and how they need to proceed.