“I’m on Social Security disability.”

The 80% rule

Social Security reduces disability benefits where the combined total of SSDI and workers’ compensation exceeds the higher of:

• 80% of your “average current earnings” before the disability began, or
• your total family benefit amount.

“Average current earnings” is the highest of your average monthly earnings over the years used to compute your disability benefit, your average monthly earnings during the best five consecutive years after 1950, or your average monthly earnings in your single highest-earning calendar year among the year your disability began and the five years before it.

Where workers’ compensation exceeds that “applicable limit,” the SSDI benefit is reduced.

The offset generally continues until you reach full retirement age, which is 66 to 67 depending on your year of birth — not 62 or 65. (The age-62 cutoff applies only to disabilities that began before March 1981.)

Where the planning matters

A lump-sum workers’ compensation settlement is also subject to the offset.

The amount is “prorated to reflect the monthly rate that would have been paid” as if periodic payments had continued — and medical and legal expenses can be excluded from that calculation.

Which means two things about a settlement document:

The proration language matters. A lump sum spread over a longer period produces a lower monthly rate and a smaller offset than the same sum treated as a short burst.

And excludable expenses should be identified. Attorney’s fees, medical expenses, and case costs can be carved out of the amount subject to proration.

This is not a trick — it is how the rules work, and it is applied every day by people who know to ask for it. A settlement drafted without it can cost a worker months of SSDI they were entitled to keep.

And the tax consequence

Workers’ compensation is generally excluded from income.

But the portion of your workers’ compensation that causes the SSDI reduction is treated as Social Security benefits for tax purposes — and Social Security benefits can be taxable depending on total income.

So a worker receiving both can owe tax on part of what they assumed was tax-free. More on the tax question.

Medicare, if you are or will be eligible

Where future medical treatment is being closed out, Medicare’s interest has to be considered. CMS reviews a proposed Workers’ Compensation Medicare Set-AsideMSA — Medicare Set-Aside Funds allocated for future injury-related care where Medicare’s interest is involved. CMS reviews above $25,000 for current beneficiaries, or $250,000 with enrollment expected within 30 months. where you are a current beneficiary and the settlement exceeds $25,000, or where enrollment is reasonably expected within 30 months and the anticipated settlement exceeds $250,000. Submission is voluntary, not mandatory. What comes out of your settlement.

We are workers’ compensation attorneys, not tax or benefits advisors. This is general information about how these systems interact. If you receive SSDI and you are contemplating a settlement of any size, get the offset and tax consequences reviewed before you sign.