The Importance of Drafting Social Security Offset Proration Language in Your Workers’ Compensation Settlement Documents

Author:  Gregory Lisowski – Chief Legal Counsel MSA Services, LLC

Workers’ compensation and Social Security Disability Insurance (SSDI) benefits are two important sources of income for individuals who have suffered an injury or illness that prevents them from working. While workers’ compensation benefits typically provide the primary source of financial assistance to injured workers, SSDI can also provide a steady source of income for those with a work-related disability. Although an injured worker can be eligible to receive both types of benefits concurrently, 42 U.S.C. section 424a places a ceiling on the amount of benefits he or she can receive in a given month. This section, and the supporting regulations cap the combined amount of workers’ compensation and SSDI benefits to be no more than 80% of an injured worker’s pre-injury average current earnings (ACE) or total family benefit (TFB). In most cases, it is the injured worker’s SSDI monthly benefit and not the injured worker’s weekly workers compensation benefit that is reduced dollar for dollar. The offset of SSDI benefits is meant to ensure that an individual is not receiving more from a combination of benefits than the person earned in wages prior to the injury. Social Security Disability Insurance benefits automatically change to retirement benefits when an individual reaches full retirement age. The offset applies until the injured individual has reached their full retirement age.

In this article, we will explore the impact of workers’ compensation benefits on Social Security benefits and discuss how to mitigate the offset through the use of offset proration language in settlement documents. It is important to remember that while the injured worker is receiving weekly workers’ compensation benefits, there is nothing that a practitioner can do to mitigate the impact of the offset. However, knowing how to draft appropriate offset language for settlement documents can mitigate the impact that a lump sum settlement has on the injured worker’s monthly SSDI benefit. In many cases, the drafting of Social Security offset proration language can allow the injured worker to receive a lump sum settlement while also increasing the amount of his or her monthly SSDI benefits.

If an injured worker settles their workers compensation case via lump sum settlement and does not include offset proration language in the settlement documents, the Social Security Administration will calculate the offset using a rate based upon either 1) the last periodic rate paid to the injured worker prior to settlement, or if no prior rate was established 2), the maximum rate from the jurisdiction where the worker was injured. Allowing the SSA to calculate the offset of a lump sum settlement by using either the actual compensation rate or the maximum rate allowable, does not typically result in the most advantageous offset calculation for the injured worker. The opportunity to maximize an injured worker’s monthly benefit can only be accomplished by the inclusion of artfully crafted language from a skilled practitioner.

There are four main methods of proration allowed by the Social Security Administration. Three of the four methods are outlined in the Program Operations Manual System (POMS) which is the primary source of information used by Social Security employees to process claims for Social Security benefits. These methods include Method A (Delayed Offset), Method B (Reduced Weekly Rate) and Method C (Offset Acceleration). The fourth method, known as the Hartman/Sciarotta is not actually described in the POMS but was established via caselaw and has become the most common method of minimizing the offset.

To determine the most advantageous method of proration a three-step process should be applied. The first step is defining the gross amount of the settlement or commutation. Next, one must determine the start date of the proration. Finally, one must identify the excludable expenses which are payable from the gross settlement amount. POMS DI 52150.050 sets forth those items that are “excludable expenses” used to reduce the gross amount of the lump sum payment. Excludable expenses include attorney fees, legal costs, penalties and interest, past medical expenses, future medical expenses (including a Medicare set-aside) and spousal/dependent benefits. Knowing which method of proration provides the most advantageous offset calculation is an important skill that even the most experienced workers’ compensation attorneys sometimes fail to fully appreciate.

In Method A (Delayed Offset), the excludable expenses are deducted at the beginning of the proration period. This method is best used when the injured worker is approaching full retirement age or about to return to work. The purpose of this method is to delay the offset until after the injured worker’s benefits are discontinued or converted from SSDI to Retirement benefits.

In Method B (Reduced Weekly Rate), the excludable expenses are treated as a percentage of the gross settlement amount. This method allows one to spread the excludable expenses over the life of the award. Method B is typically used if the injured workers’ average current earnings (ACE) are high.

In Method C (Offset Acceleration), the excludable expenses are applied at the end of the proration period. This method is meant to shorten the offset period so that the proration ends before the injured worker is entitled to receive SSDI benefits. It is most advantageous to use Method C if there are a lot of excludable expenses and the injured worker has yet to apply for SSDI.

In the Hartman/Sciarotta method, the settlement amount is prorated by a rate that is calculated based upon the life expectancy of the injured worker. This method typically results in a lower effective rate than the other methods referenced in the POMS.

If a practitioner knows that his client is receiving, has applied or may apply for SSDI, it is strongly recommended that appropriate proration language is included in the settlement documents. There is no valid reason not to include proration language in the settlement documents since failing to properly address the offset can cost the injured worker thousands in Social Security benefits over their lifetime. If you are not sure how to draft the language or know which method would result in the most advantageous outcome for your client, you should reach out to an expert who knows how to do the calculations using all four methods allowable by the Social Security Administration.