The Social Security Administration (SSA) rules have the tendency to impede injured and economically disadvantaged workers from obtaining adequate workers' compensation recovery. The rules permit the federal government to offset lump-sum workers' compensation benefits in a manner that will erode the total dollars being paid to the injured employee.
Current Offset Law
The present Social Security regulations provide for a reduction in Social Security disability benefits when the total amount of both the workers' compensation benefit and the Social Security disability benefit exceeds 80 percent of the worker's "average current earnings" (ACE) before becoming disabled. 42 U.S.C. §424a; 20 CFR §404.408 (1995). The constitutionality of the law was held valid by the U.S. Supreme Court based upon the necessity for non-duplication of benefits. Richardson v. Belcher, 404 U.S. 78 (1971), Lofty v. Richardson, 440 F.2d 1144 (6th Cir. 1971), cert. denied, 404 U.S. 985 (1971).
The term "average current earnings" is the largest of either: the average monthly wage for the purpose of calculating Social Security benefits, the average total wages on a monthly basis for five consecutive calendar years after 1950 for which the wages and self-employment income were at the highest level, or one-twelfth of the total wages and self-employment income for the calendar year in which the beneficiary had the highest wages and income during the period of time consisting of the calendar year in which the beneficiary became disabled and the five years preceding that year. 42 U.S.C. § 424a(a). The offset only comes into effect when the worker has actually received workers' compensation benefits.
The Federal government has singled out State workers' compensation programs for setoff. Recoveries that are not subject to setoff include the Federal Employee's Liability Act, The Railroad Unemployment Insurance Act, unemployment compensation, employer sick or disability plans, Part B black lung benefits, Jones Act benefits, Veterans and Welfare payments, private pension or insurance benefits, and public disability benefits payable to a public employee based on employment that was subject to taxation. 20 CFR §404.408(b)(2)(ii) (1995).
The New Jersey Workers' Compensation Act mandates an offset for Social Security disability benefits against workers' compensation benefits. New Jersey is considered to be a "reverse offset" State. The insurance company is permitted to take a credit from the workers' compensation award if the injured worker is under the age of 62 and is receiving Social Security disability benefits. N.J.S.A. 34:15-95, N.J.S.A . 34:15-12(b).
The Lump-Sum Payment
The State of New Jersey permits a lump-sum benefit under the Workers' Compensation Act pursuant to N.J.S.A. 34:15-20. Such a disposition is not deemed to be a payment of compensation. However, the payment can be used for statistical purposes by the N.J. Compensation Rating and Inspection Bureau as a determining factor in establishing premium ratings. This section, N.J.S.A. 34:15-20, was enacted to legitimize the process of providing benefits to injured workers and their dependents. Prior to the enactment of N.J.S.A. 34:15-20, it was difficult for the parties to resolve contested claims, especially in dependency situations, where there was no mechanism available for a compromise of the claim. Prior to the 1979 amendments, the law required the payment of full dependency benefits or, in the alternative, the dismissal of the claim. Partial payment was not available as a vehicle for resolution of these serious and difficult cases.
A fictitious practice developed before the Division of Workers' Compensation encouraging the parties to dismiss the pending claim and resolve the matter by way of the payment of a lump sum. A release and dismissal was entered into by the parties prior to the filing of a Notice of Appeal. This permitted the resolution of the contested matters on an amicable basis. This practice was contrary to the intent of the Workers' Compensation Act. The legislature had provided for a review of compensation matters by an administrative agency so that a fair and reasonable resolution of the conflict could be achieved. Bronstein & Co., Inc. v. Hoffman, 117 N.J.L. 500 (1937).
Since the enactment of N.J.S.A. 34:15-20, which became effective on January 10, 1980, many of the most serious, complex and questionable claims are now disposed of by utilizing the lump-sum payment method. Disposition pursuant to N.J.S.A. 34:15-20 has been expanded from dependency claims to include lifetime claims, both traumatic and occupational in nature. Approximately 20 percent of all dispositions in New Jersey utilize the lump-sum payment. In some instances, the stipulated settlement incorporates a "structured settlement" agreement permitting the petitioner to receive "periodic payments" in accordance with an attached schedule.
The Federal court has reviewed the process of allocating the value of the lump-sum benefit in New Jersey workers' compensation claims into a periodic benefit to comply with the required setoffs available to the Social Security Administration. The Court indicated that the payment of a lump-sum workers' compensation benefit does not necessarily render the claimant immune from further reductions or offsets of Social Security disability benefits.
An injured worker was paid workers' compensation temporary disability benefits for approximately one year while he was under active medical treatment. Following the payment of temporary disability benefits the worker applied for and was awarded Social Security disability benefits. The workers' compensation claim was disposed of by a settlement involving a lump-sum payment. In order to reduce the credit due Social Security, the employee contended that the payment was intended to extend over his entire lifetime. SSA converted the lump-sum settlement into periodic payments in accordance with the instructions set forth in its Program Operations Manual System (POMS). The SSA used the temporary disability rate that the petitioner had been paid to prorate the award into periodic payments. The Court determined that the method used by the SSA was neither arbitrary nor capricious and permitted the setoff. Rodlin v. Secretary of Health and Human Services, 750 F.Supp. 146 (D.N.J. 1990).
The Third Circuit Court of Appeals held that the SSA must use a method of prorating that is rational and appropriate. An injured worker suffered a heart attack at age forty-nine and received a lump-sum benefit ($40,000.00 less $5,000.00 counsel fees) in accordance with N.J.S.A. 34:15-20. The petitioner alleged that, despite the fact that the workers' compensation rate was $156.00 per week, the $35,000.00 workers' compensation lump-sum payment should be prorated over his life expectancy of 23.91 years. This would reduce the payment of compensation to $28.00 per week and avoid an offset by the Social Security Administration. The Court sided with the claimant and remanded the matter to the District Court to determine whether or not the SSA's allocation of $156.00 per week was rational. Upon remand, the District Court decided that the administrative procedures set forth in the POMS, when applied to the petitioner, were irrational and inconsistent, and therefore could not be utilized to prorate the lump-sum award. Sciarotta v. Bowen, 735 F. Supp. 148 (D.N.J. 1989).
Certain exclusions are currently permitted by the SSA in the calculation of what portion of the lump-sum benefit is subject to proration. Certain expenses can be deducted such as legal expenses in the recovery of the workers' compensation benefits, past and future medical expenses, rehabilitation payments, penalties and those benefits which are paid directly to dependents. POMS DI 52001.535(1992).
In instances where an employer seeks a third party credit pursuant to N.J.S.A. 34:15-40, the prorated share of the counsel fee to the employee is not considered subject to a Social Security setoff. The payment is rationalized to be not a payment of compensation but a payment for reimbursed counsel fees. A third party recovery amounting to $896,000.00 was subject to a counsel fee of 25.26%. The respondent made payment in the workers' compensation action of 100% permanent disability. In the workers' compensation action, the employer's obligation was reduced by a setoff taken by the respondent's insurance carrier for Social Security payments made pursuant to N.J.S.A. 34:15-95.5. The actual statutory reimbursement to the employee for counsel fees in recovering the employer's lien pursuant to N.J.S.A. 34:15-40 was not a payment of compensation and therefore was not subject to offset. Fiore v. Trident Construction Company, 251 N.J. Super. 101 (App. Div. 1991).
The 1997 Rule Change
On September 4, 1997, the SSA changed rules to modify the reduction of disability benefits involving workers' compensation and public disability benefits and payments embodied in 20 CFR §404 (1995), 62 Fed. Reg. 46682 (1997) (This has been codified at 20 CFR Part 404.408). SSA alleged that they have observed an ever-increasing number of cases throughout the nation where attorneys are requesting workers' compensation insurance companies to specify an artificially low rate in lump-sum awards to avoid reimbursement to the SSA. Attempts to amend workers' compensation awards to adjust the rates over life expectancy are deceptive. SSR 97-3, 62 Fed. Reg. 51923-51926 (1997).
The 1997 rules embody a three-tier test under which proration of lump-sum awards can occur:
- First, the rate specified in the award; but only if the rate is based upon the percentage of the workers' average weekly wage required by State Law;
- Second, the periodic rate paid prior to the lump-sum award (if method one does not apply); or
- Third, the State's maximum weekly rate in effect at the time of the injury (if methods one and two do not apply).
Additionally, SSA desires to exclude only legal and medical expenses in determining what benefits are subject to reimbursement. The method to be used in prorating a lump-sum award with excludable expenses would remove the offset at the earliest possible time and could even end the proration prior to the first possible month of offset. This method would reduce the lump-sum award by the amount of the excludable expenses prior to the proration. Previously, it was possible to delay imposition of the offset because the method used allowed SSA to take excludable expenses from the beginning of the proration.
The second method being rejected by SSA's new proposals provided for division of the lump-sum award minus the expenses by the total lump-sum award. That percentage was then multiplied by the weekly rate resulting in a reduced weekly rate. This procedure reduced the weekly workers' compensation rate so that the entire offset amount was lower during the entire proration period. The rules remove the term "related" expenses. In the past it was possible to remove expenses such as new homes, patios, ramps, costs of vans and vacations, moving expenses to a milder climate, etc. from the lump sum to determine proration. The 1997 rules restrict expenses only to medical and legal expenses.
The intent of the Social Security Administration was to follow the directive of Congress to prevent double recovery. However, the imposition of the 1997 rules shifted the burden from the Federal prograph to the State systems.
In many denied totally disabled workers' compensation claims, the injured worker has been receiving Social Security disability benefits to subsist and all other bills continue to accumulate during the pendency of the compensation action. Usually the workers' compensation lump-sum settlement helps the worker to pay back medical and other bills and permits him or her to catch up financially. If adequate compensation cannot be recovered from the Federal government, the worker will seek recovery from the State systems.