"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 primary insurance amount basis, your average monthly earnings during the best five consecutive years after 1950, or your average monthly earnings in your single highest-earning calendar year.

Where workers' compensation exceeds that "applicable limit," the SSDI benefit is reduced.

The offset generally continues until age 62 or 65, depending on when the disability began.

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 under IRC § 104(a)(1).

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-Aside 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.