Social Security: Offsets & Structuring Workers' Compensation Settlements
Published in the California Workers' Compensation Enquirer, September 1999
The interrelationship of public disability programs is an ever-increasing area of legal complexity. As temporary and permanent disability rates are increased by legislative action, the possibility of a crossover impact on Social Security benefits becomes more likely, even for wage earners in the middle class. Practitioners must use great care when safeguarding the legal rights of their clients in this area.
Present law (section 224(b) of the Social Security Act) allows the Social Security Administration, under certain circumstances, to reduce disability benefit payments to injured or ill persons who are also receiving workers' compensation benefits.
When the combined total of the disability benefits paid under both programs (workers' compensation and Social Security) exceeds 80% of the individual's pre-disability earnings, the Social Security Administration is entitled to make a dollar-for-dollar "offset" (or reduction) for the amount in excess.
In Social Security terms, an individual's pre-disability income is referred to as his/her "average current earnings" (or "ACE"). 42 U.S.C. 424a(a) provides three methods of calculating an individual's ACE:
(1) by computing the "average monthly wage", a figure which is computed primarily (but with some additional considerations) by dividing the total of all wages and self employment income by the number of months in the span of time over which the wages and self-employment income were earned;
(2) by computing 1/60th of the total of wages and self-employment income for 5 consecutive calendar years after 1950 for which such wages and self-employment income were highest;
(3) by computing 1/12th of the total of wages and self-employment income for the calendar year in which the individual had the highest such wages and income during the period consisting of the calendar year in which he/she became disabled and the 5 years preceding that year.
Using one of these three methods (the one which generates the highest number), the Social Security Administration calculates the individual's ACE, reduces the ACE by 20%, and then compares the resulting amount to the sum total of the individual's monthly workers' compensation payment plus his/her monthly Social Security disability entitlement. Where the ACE (after reduction by 20%) is less than the sum total of the disability payments, a dollar-for-dollar offset will be applied to the overage.
This feature of the Social Security law affects low income workers much more often, and much more dramatically, than higher income workers. The reason is simple: the lower the worker's pre-disability income (that is, the lower the ACE), the more likely that his/her Social Security entitlement will combine with workers' compensation benefits to reach the 80% threshold which triggers an offset. The higher the earnings, the less likely the 80% threshold will be reached.
PAYMENTS NOT SUBJECT TO OFFSET
Certain benefit payments are not included in the workers' compensation offset:
(1) Payments made under the Federal Employers Liability Act (Railroad Workers);
(2) Sickness benefits paid under the Railroad Unemployment Insurance Act;
(3) Unemployment Compensation;
(4) Company sick or disability plan benefits;
(5) State payments for non-work-related disability;
(6) Part B Black Lung benefits;
(7) Jones Act benefits;
(8) VA and Welfare benefits;
(9) Private pension or insurance benefits; and
(10) Public disability benefits (except Workers' Compensation) payable to a public employee based on employment covered under Social Security.
It should be noted SSA cannot offset where the employer receives the workers' compensation payments while providing the injured worker his salary under a formal or informal salary continuation plan. Offset only applies when the worker has actual use of the Workers' Compensation payments.
See Social Security Program Operations Manual System ("POMS") DI 52001.070, DI 52001.075, DI 52001.535. Appeals Council Decision, SS Ruling 70-57a (Nov. 1970). 20 C.F.R. Section 404.408(b)(2)(ii).
Certain other benefits, including VRTD paid in addition to, but not in lieu of periodic benefits, are totally excluded from the lump sum subject to offset as are funds for home health aids (in the form of skilled nursing care), penalties, payments to dependants, and attorney's fees (20 C.F.R. 404.408(d)).
Section 404.408(d) of 20 C.F.R. states: "Items not counted for reduction. Amounts paid or incurred, or to be incurred, by the individual for medical, legal or related expenses in connection with the claim for public disability payments" or workers' compensation . . . are excluded in computing the workers' compensation offset.
The excludable expenses must be properly documented to the satisfaction of Social Security (20 C.F.R. 404.408(d); POMS DI 52001.535). They must reflect "either the actual amount of expenses already incurred or a reasonable estimate, given the circumstances in the individual's case of future expenses . . .".
These excludable expenses may be shown by the Compromise, Court Order, or "other evidence as the Social Security Administration may require" such as:
(1) A detailed statement by the individual's attorney, physician, or employer's insurance carrier; or
(2) Bills, receipts, or canceled checks; or
(3) Other clear or convincing evidence from which the amount of expenses may be determined.
The workers' compensation community has long been aware that medical expenses paid by an injured worker in connection with his workers' compensation case are excludable, including a portion of a settlement or award specified as for future medical expenses. However, this must be based on a reasonable estimate, considering the specific circumstances of the case. These estimated medical expenses must be established by the evidence, or will not be excluded. (20 C.F.R. 404.408(d)). Thus, in Smith vs. Weinberger, 381 F.Supp. 1307 (E.D.Mich.1974) the Court refused to exclude future medical expenses because the agreement did not clearly designate an amount for future medical expenses and did not identify actual projected future medical expenses. See too, Hatch vs. Heckler, 626 F.Supp. 1367 (N.D. Calif 1986). But practitioners must use other cautions, however, in establishing allocations for medical care, as there is a potential conflict with medicare coverage (see below).
Workers' compensation payments to a widow for death benefits are entirely excludable from any Social Security offset, as they are not made to the "individual" worker under 42 USC 424a. Similarly, any penalties assessed against the carrier, inuring to the employee's benefits, are excluded from the offset, since these are not based on the nature and extent of the employee's disability. (See POMS DI 52001.075)
LUMP SUM DISBURSEMENTS
In many cases, individuals receive some or all benefits in the form of a single lump sum. When lump sum benefits are received, the lump sum amount is regarded by the Social Security Administration as a substitute for periodic payments. The Administration will regard the lump sum amount as representing some form of periodic payment, and, for purposes of calculating any offset, will treat the lump sum as an amount which otherwise would have been paid periodically. Current law allows the Social Security Administration to substitute a reasonable periodic payment rate for the lump sum.
What periodic rate should be substituted? In most cases, the longer the period over which the lump sum (after excludable expenses) can be "spread," the better for the worker, because a longer spread means a lower monthly benefit rate is factored into the offset calculations, with less resulting likelihood of an offset.
42 USC 424a(a) merely requires that a "reasonable method of calculation" be used to determine whether a lump sum settlement triggers an offset. Pursuant to Social Security Ruling 87-21c, which has the force of law, the Administration will select one of the following rates, in the following order of priority:
(1) the rate specified in the award. The Administration must first apply any rate which has been specified in the award. If the award specifies a rate based upon life expectancy, that rate will be used.
(2) the periodic rate paid prior to the award (e.g. the TTD rate or, if applicable, the PD rate, whichever was last paid), if no rate has been specified in the award, or
(3) the State's workers' compensation maximum rate in effect at the time of injury, if no rate was specified in the award, and if no periodic payments were made. Forty two States have established a periodic maximum rate of sixty-six and two thirds percent of the worker's pre-disability income.
If the TTD rate (usually much higher than the PD rate), or even the PD rate is used, there is a much greater likelihood of triggering an offset. Almost always, it is in the worker's best interest to spread the lump sum over the remaining years of expected life, based upon use of life expectancy tables. (Each case, naturally, should be determined on its own merits.) This method of determining a periodic rate most often results in minimal reduction of Social Security disability benefits and provides a maximum amount of protection for the low wage earner.
To see why, let us look at the example of a 47 year old male wage earner who was earning $2,000 per month (his ACE) until he was injured in an industrial accident. His injuries are sufficient to prevent him from working, and he is entitled to receive $1,350 per month from Social Security (which includes $450 per month paid to his wife and two children). The injury resulted in a long period of treatment and rehabilitation, during which he was paid $310 per week (or $1334 per month) in temporary disability benefits from his employer's workers' compensation insurance carrier (representing sixty-six and two thirds percent of his pre-disability income). Ultimately he reached a settlement with the insurance carrier whereby he will receive, through a compromise and release, a lump sum payment of $45,000.
His temporary workers' compensation benefits, when added to his Social Security entitlement, creates a total $2,684. This amount exceeds the 80% threshold of his pre-disability income ($1,600) by $1,084, entitling the Social Security Administration to make a $1,084 reduction in his Social Security disability benefits, paying him only $266 per month.
When the compromise and release ("C&R") is negotiated, the temporary benefits have stopped, and the worker's full Social Security entitlement of $1,350 per month would normally be paid from that point on. But now our worker has negotiated a $45,000 lump sum settlement. Since the lump sum is regarded as a substitute for periodic benefits, the question becomes: what periodic rate to use as a substitute for the lump sum amount when determining if there will be an offset imposed? If the State's maximum rate is used (sixty-six and two thirds percent), Social Security will continue to impose an offset of $1,084 each month for approximately three and one half years, when the total amount offset will have reached $45,000.
However, the worker's attorney looks at life expectancy tables and discovers that his 47 year old male client has a 30 year life expectancy. He spreads the $45,000 over the 30 years of remaining life, resulting in a periodic rate of $125 per month. In the C&R document, the lump sum settlement is defined as a permanent disability payment, and apportions it over his remaining life, representing periodic payments at the rate of $125 per month for the remaining 360 months (or 30 years) of his expected life.
If this rate is used, there will be no offset whatsoever. The worker's monthly Social Security entitlement ($1,350) and his recalculated workers' compensation benefit ($125 per month) total only $1,475. This is less than 80% of his monthly pre-disability income. This results in no offset whatever.
WHEN SPREADING A LUMP SUM OVER THE APPLICANT'S LIFETIME IS OF NO HELP IN REDUCING OFFSET, APPLY THE EXCLUDABLE EXPENSES CLEVERLY
Even where a lump sum settlement is spread over the expected life of the injured worker, an offset is still possible if the worker is elderly, or if the lump sum is exceptionally large. In these unique situations, and others, there are alternatives which can reduce or eliminate the possibility of an offset.
Once a permanent disability rate is determined, and once excludable expenses have also been determined, the workers' compensation practitioner can, in some cases, reduce the likelihood of an offset by careful consideration of how the excludable expenses will be applied to the lump sum spread.
Current law requires the Social Security Administration to use one of three methods, depending on which one is most advantageous to the claimant, referred to as "Method A," "Method B" and "Method C".
By this method, much like some tax deductions, excludable expenses are excluded "up front" at the beginning of the proration period, and before the remainder of the lump sum is prorated. By doing this, a Social Security beneficiary can actually avoid offset completely, at least until Social Security disability benefits paid out to the claimant become equal to the excludable amounts.
This "front loading" of excludable expenses is intended to help disabled persons who are approaching retirement age, and who would be converting to retirement benefits after only a short time of receiving disability benefits. It allows them to receive disability benefits for a short time with no offset whatever, and then to avoid the effects of an otherwise problematic offset later . Consider using this method not only in the case of those nearing retirement age, but also in the case of some children, and other auxiliary beneficiaries, who will qualify for auxiliary benefits only until their 18th birthday, and who are approaching that age. This method of application also helps persons who receive a closed period of disability (that is, a period of disability which has lasted at least one year, but which has already ended) from Social Security.
To illustrate how this works, let us assume an individual who is 59 years and 6 months old. Life expectancy tables tell us that he has 15 years and 6 months of life expectancy (or 186 months). His ACE is $2,000 per month, 80% of which is $1,600. He is receiving $1,200 per month from Social Security disability insurance benefits.
Due to a terrible injury at work, our example gentleman achieves a 100% disability rating, which yields a PD rating of $336 per week. He settles a workers' compensation case by Compromise and Release, the terms of which provide for a lump sum payment of $744,000 to the applicant, and $100,000 payable to the attorney for attorney fees.
If no periodic rate is inserted into the Compromise and Release, Social Security will use the PD rate of $336 per week as a substitute "periodic rate" for offset purposes. When the $336 per week (or $1456 per month) is added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $1,056. This will generate an offset of $1,056 per month, reducing the worker's Social Security entitlement to $144 per month.
Spreading the $744,000 lump sum over the 186 months of remaining life expectancy provides no relief from offset. To do so yields a periodic rate of $4,000 per month. When the $4,000 is added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $3,600, generating a complete offset of his Social Security disability benefits, reducing them to zero. Can anything be done to protect his benefits?
Yes, by "front loading" the excludable expenses (in this case the $100,000 attorney fee) when applying them to the lump sum award. The $100,000 fee represents approximately 5 years and 8 months of benefits at the rate of $336 per week (the PD rate). Since the attorney fee is an excludable expense, the Social Security Administration will forbear imposing the offset for 5 years and 8 months, by which time the worker will have reached age 65. Since his Social Security entitlement is not subject to offset after age 65, applying the PD rate of $336 per week against the excludable expenses first, and the remaining 744,000 later, completely avoids the offset.
A second possible method of applying excludable expenses to the lump sum award treats the excludable expenses as a percentage of the total award, and requires the Social Security Administration to reduce the periodic rate which would otherwise apply by a corresponding percentage.
As an example, let us consider an individual who is 45 years and 6 months old. Life expectancy tables tell us that he has 29 years and 6 months of life expectancy (or 354 months). His ACE is $2,000 per month, 80% of which is $1,600. He is receiving $1,200 per month from Social Security disability insurance benefits.
Due to a work injury, our example gentleman achieves a 50% disability rating, which yields a PD rating of $140 per week. He settles a workers' compensation case by Compromise and Release, the terms of which provide for a lump sum payment of $380,000, of which $250,000 will be paid to the applicant, and $130,000 payable for medical expenses and attorney fees.
If no periodic rate is inserted into the Compromise and Release, Social Security will use the PD rate of $140 per week as a substitute "periodic rate" for offset purposes. When the $140 per week (or $606.66 per month) is added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $206.66. This will generate an offset of $206.66 per month, reducing the worker's Social Security entitlement to $993.34 per month.
Spreading the $250,000 lump sum over the 354 months of remaining life expectancy provides no relief from offset. To do so yields a periodic rate of $706.21 per month. When added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $306.21, generating an even greater offset of his Social Security disability benefits, reducing them to $893.79.
Using "Method A" and front-loading the excludable expenses will prevent offset for a period of 17 years and 10 months, by which time he will not yet have reached age 65. At that point, the offset will begin, and continue for nearly two more years.
"Method B" will protect this worker from offset completely. The $130,000 in medical and legal fees are excludable expenses, and represent 34% of the total award of $380,000. When the PD rate of $140 week is reduced by a corresponding 34%, the resulting weekly rate is $92.11 per week, or $399.14 per month. When this monthly result is added to the worker's current Social Security disability entitlement of $1,200 per month, the total is less than 80% of his ACE, ergo no offset.
This third method of applying the excludable amounts to the lump sum will be advantageous in a situation where the worker began receiving Social Security Disability benefits a long while after his/her workers' compensation periodic benefits ceased.
Using Method C, the lump sum is first reduced by the amount of excludable expenses. The periodic rate is then applied to the lump sum beginning on the date when the periodic benefits ceased, and continuing until the amount of the lump sum is exhausted. Use of "Method C" often results in no (or less) offset because the is exhausted before (or shortly after) the entitlement to Social Security disability benefits begins.
As an example, assume an individual who was injured at work on January 1, 1988. He received TTD benefits until November 30, 1990, at which time he became permanent and stationary with residual, permanent levels of impairment. Due to a substantial dispute concerning the extent of permanent disability, no periodic benefits or PD advances were paid after November 30, 1990.
In January, 1999, he applied, and was awarded, Social Security disability benefits retroactive to January 1, 1998 (one year before the date of his application, which is the maximum allowable retroactive benefit). Since that time, he has received $800 per month from Social Security. He is a low wage earner, with an ACE of $1,500.
On July 1, 1999, he settled the case through Compromise and Release, providing for a lump sum settlement of $100,000, of which $15,000 represents attorney fees and medical expenses. He was considered 100% disabled, yielding a permanent disability rate of $1000 per month (66 and 2/3 percent of his pre-injury monthly earnings). He is 58 years of age, with a life expectancy of exactly 14 years (168 months).
If his attorney does nothing, Social Security will add $1000 to his Social Security benefit of $800, for a total of $1,800. The Administration will then compare this number with his ACE (after applying a 20% reduction), or $1200, yielding an offset of $600, and reducing his Social Security payments to $200 per month.
Using life expectancy tables to spread the $85,000 lump sum over the remaining 168 months of his expected life does not help much. This yields a periodic rate of $506 per month, which still results in an offset of $106, reducing his Social Security benefits to $694.
Using "Method A" to front-load the $15,000 excludable expenses causes the Administration to forbear offset for less than 2 years, after which an offset of $567 per month will remain in effect for 5 years until he reaches age 65.
Using "Method B" to reduce the periodic rate ($1,000 per month) by the percentage of settlement represented by the excludable expenses (15%) also results in an offset of $450, and reduces his Social Security entitlement to $350 per month.
Use of "Method C" results in no offset, because "Method C" presumes the periodic rate will be applied to the lump sum starting on some date before the applicant became eligible for the lump sum. The Social Security Administration determines the start date of the application of the offset in the following order of priority:
1. the lump sum will be allocated to the period specified in the award, or
2. If no date is specified, and periodic payments were made, the lump sum will be prorated beginning the day after the periodic payments ended, or
3. If the lump sum award does not specify a beginning date, and the worker did not receive periodic payments, the lump sum is allocated to:
- the date of injury for workers' compensation, or
- the date of employment termination for occupational disease, or
- the date the illness began for permanent disability benefits.
In our hypothetical example, the worker received periodic benefits until November 30, 1990. Using December 1, 1990, as a starting date for the application of a $1000 monthly periodic rate against a lump sum (reduced by the excludable expenses) of $85,000 results in the offset being exhausted after 85 months (7 years and one month), or by December 31, 1997. This will result in no impact whatever on his Social Security disability benefits because he did not begin to receive them until January, 1988.
When a workers' compensation settlement looks as if it will impact a client's entitlement to Social Security disability benefits - even after the lump sum award is spread over the remaining expected life of the applicant - there still may be workable solutions to the problem.
STRUCTURED SETTLEMENTS, ANNUITIES AND IRREVOCABLE TRUSTS
The Social Security Administration ("SSA") issued Social Security Ruling 81-32 to discuss the applicability of the offset provisions of section 224 of the Act to annuities awarded in a workers' compensation settlement.
Generally speaking an annuity is considered as workers' compensation benefits when it is an integral part of an award.
According to this ruling, "[i]t is the position of the Social Security Administration (SSA) that where the W/C award gives the worker an option of receiving a cash lump-sum payment or having the employer or insurer purchase an annuity, the worker's exercise of that option constitutes his or her receipt of the lump-sum or purchase price. Thus, a worker who chooses to receive a lump-sum amount is considered to have been paid that amount regardless of whether he or she uses it to purchase an annuity. Where the worker exercises an option to have the employer or insurer purchase an annuity, it is the purchase price of the annuity which he or she is considered to have been 'paid' within the meaning of section 224(a) of the Act." (SSR 81-32).
Thus, the critical test in determining how SSA will view the settlement depends on whether the worker had the "option" to convert the annuity into a lump sum.
SSR 81-32 sets forth the following example:
"A worker's WC award consisted of a lump sum of $10,000, and an annuity to be purchased by the employer and insurer to provide the worker a lifetime income of $500 per month for the first year with an increase in the monthly amount after that under a five percent compound interest escalator schedule. ... The insurer advised that the lump-sum settlement and the annuity are completely separate; the worker did not have the option to receive the lump-sum settlement only; the worker did not determine the amount of the monthly payment from the annuity; and the monthly payment from the annuity was payable immediately. Although the annuity was part of the WC settlement award agreed to by the worker, he did not have the option of converting the purchase price of the annuity into a lump sum." (SSR 81-32).
In this example, because the worker did not have the option of taking a lump sum in lieu of the annuity, he or she did not have the "dominion and control over the time and manner of the annuity payments." When SSA determines whether the receipt of the annuity payments will cause an offset on the Security Disability benefits, the offset computation must be done at the time the annuity payments are actually paid to the worker.
Consequently, when settling a case by a structured settlement which involves an annuity, the attorney must consider the effects of the agreement on the worker's Social Security disability benefits. It is important to remember that whether the worker had the option to elect an annuity or it was a mandatory term of the agreement required by the defendant and insurance carrier is what governs when SSA determines the applicability of the offset provisions set forth section 224 of the Act.
If the worker did not have the option to elect an annuity and it was a mandatory term of the agreement, then SSA will use the monthly payment amount received at the time it is paid for the purposes of offset calculations. On the other hand, if the worker was given an option which he or she elected, then SSA is instructed to consider the amount paid up-front which will enable the application of the life time proration method for offset calculations if these instructions are set forth in the compromise and release. This method may be preferable if it will minimize an offset or remove the offset altogether. The attorney should, therefore, carefully examine the circumstances of each case and always take into consideration the worker's average current earnings ("ACE," or 80% of his/her pre-disability income) and monthly Social Security Disability benefit amount.
SSA published Social Security Ruling 81-20 which discusses the issue: how SSA should consider the effect of irrevocable trust agreements under a compromise and release settlement when computing offsets under the provisions of section 224 of the Act.
SSR 81-20 gives the following example:
"On April 6, 1971, a Workmen's Compensation Appeals Board approved a 'Compromise and Release' of the claim filed by [worker] against his employer. The amount of the settlement, $23,548.58, was paid 'in lieu of' periodic payments. Pursuant to this approval, the Board awarded [worker] $1,000, paid certain medical-legal costs and attorneys' fees, and provided that the remainder of the award ($19,178.21) would be payable to a bank as trustee under the terms of an irrevocable trust entered into by [worker] and the bank. The trust was to terminate on January 1, 1980, unless terminated earlier by [worker's] death. This trust was created pursuant to an order of the Workmen's Compensation Appeals Board. Thus, the workmen's compensation benefits are not being paid directly to [worker] but are deposited under the terms of the trust agreement which provides that no income from the trust will be allocated to the claimant until July 1, 1972, and $50.00 a month will, commencing December 1, 1971, be allocated to [worker] from the principal."
In order to determine the effects, if any, of the periodic payments on the worker's Social Security Disability benefits, the worker's compensation award and the terms of the trust must be examined.
SSA must determine whether the $19,178.21 paid into the trust should be prorated beginning December 1, 1971 at $50.00 per month as stated by the terms of the trust or should be prorated as a lump sum on the basis of the number of weeks the lump sum is referable or on the basis of the weekly compensation rate. The method to be utilized depends on whether the worker had an option to elect the lump sum without restriction or of establishing the trust. To make this determination, SSA will look at the compromise and release agreement and the pertinent provisions of the State Workmen's Compensation law.
If the worker had the option to establish the trust, then SSA will view the entire lump sum and prorate it without "regard to the terms of the trust agreement in making the required reduction under section 224 of the Act." (SSR-81-20).
On the other hand, if the establishment of the trust were mandatory, then SSA will determine the applicability of an offset on the worker's Social Security Disability benefits by considering only those sums actually received. In the example cited above, the $1000 paid directly to the worker and the $19,178.21 paid into the trust were workers' compensation benefits payable in a lump sum as a commutation of, or a substitute for periodic payments. The worker received $1000 on May 1, 1971 and $50.00 monthly payments beginning December 1, 1971. If no part of the sums received are for excludable expenses, then SSA will only look at the sums received to determine the applicability of an offset. Any amounts referable to the original lump sum at the termination of the trust will be considered separately at that time for the purposes of offset calculations as required by section 224 of the Act. (SSR 81-20).
Consequently for the attorney settling a workers' compensation claim through a structured settlement with the establishment of an irrevocable trust, it is important to distinguish whether the establishment of the trust was mandatory or optional. The worker's ACE and monthly Social Security Disability benefits must always be considered. Depending on the worker's option or lack thereof, SSA will apply different methods in determining the applicability of an offset on the worker's Social Security Disability benefits.
"AFTER THE FACT" AMENDMENT ATTEMPTS
Sometimes a client has an application for Social Security disability benefits pending, but not yet approved, when the opportune time to settle the workers' compensation case presents itself. In such cases, any negative impact of a workers' compensation settlement upon the worker's entitlement to Social Security disability benefits will not surface until the disabled worker resolves his/her Social Security disability claim. Only then does the Social Security Administration undertake to assess the impact of the receipt of workers' compensation benefits on the worker's Social Security disability entitlement.
It is imperative, however, to consider the need to minimize the impact on Social Security disability benefits at the time the Compromise and Release documents are drafted.
On October 3, 1997 the Social Security Administration issued a new Social Security Ruling, known as "Social Security Ruling 97-3p." Ruling 97-3p, which has the effect of law, provides that the Social Security Administration is not bound by "after the fact" amendments to Workers' Compensation settlements whose purpose is, in significant part, to try to avoid the impact of a lump sum settlement on Social Security Disability benefits. Ruling 97-3p provides that if the amended terms are made solely to circumvent the Workers' Compensation offset provision, then the Social Security Administration may disregard it.
The Administration will most commonly invoke ruling 97-3p where an "after the fact" amendment to the settlement is created at some time after the settlement has been finalized. Where the amending language is filed as part of the original settlement documents, the Administration, at least at the present time, will not invoke the provisions of ruling 97-3p.
Prior to 1984, the astute workers' compensation attorney would protect his client's Social Security benefits by providing in the Compromise and Release that the bulk of the settlement proceeds were for future medical expenses. Under the Social Security Regulations and 42 USC 424(a) this characterization would be accepted if it is reasonable in light of the facts of the case. However, in 1984, the Medicare Act (42 USC 1395 y (b)(1) and regulations were changed (42 C.F.R. 411.20) clearly allowing the federal government to recover any Medicare benefits paid where a third party is responsible for payment of medical benefits.
Thus, any provision in the Compromise and Release for future medical benefits subject the worker to the same type of offset as with Social Security Disability benefits. The total amount of funds explicitly designated as and for future medical benefits must be spent for medical treatment before Medicare is required to provide medical insurance coverage. This could be disastrous for an individual who will require future medical treatment and has no other medical insurance, as his workers' compensation settlement must be totally dissipated before he can receive Medicare benefits. (42 C.F.R. 411.43(b), 42 C.F.R. 405.320). Thus, the formerly correct method of protecting the workers' compensation settlement from offset is no longer correct.
If a settlement appears to be an attempt to shift to Medicare the obligation for industrially related medical expenses, the settlement will not be recognized. (42 C.F.R. 411.46). Furthermore, this area is fraught with danger, as Medicare can reject the settlement agreement and make its own computation. However, medical expenses incurred by an injured employee after settlement may be covered by Medicare under the following conditions:
(1) Where liability for payment of future medical expenses is seriously in dispute;
(2) the Compromise and Release forecloses the possibility of any future payment of workers' compensation benefits;
(3) the claim is being resolved by Compromise and Release for substantially less than would be paid had liability not been in issue;
(4) there are no facts to indicate that the settlement attempted to shift the burden of future medical expenses for the industrial injury to Medicare.
However, even in these circumstances, Medicare may disregard the agreement. It is suggested that Compromise and Release documents regarding future medical care be drafted very carefully if Medicare is a necessary resource, spelling out the disputed liability in detail. In addition, one should warn the applicant that there is no guaranteed protection of Medicare benefits.
While representing a person in regard to workers' compensation claims, it is essential to consider the possibility of that person also claiming Social Security Disability benefits and, if so, the impact on the Social Security Disability benefits caused by the receipt of the workers' compensation benefits. Social Security Disability benefits are reduced based upon receipt of compensation benefits under State or Federal programs. The impact of the diminution in the receipt of Social Security Disability benefits based upon receipt of disability benefits from a State or Federal program is of greatest impact in the minimal wage earner cases.
Following this article are the following forms: an Informed Consent explaining Medicare and Social Security disability considerations (to be signed by the Applicant)[Appendix A], an Offset Worksheet to aid the Applicant's attorney in determining the effects of the compromise and release on Social Security disability benefits, as well sample forms Addendum - Characterization of Settlement Proceeds [Appendix B] and an Order Approving Compromise and Release and Findings of Facts [Appendix C]. Finally, we have included a Life Expectancy Table. [Appendix D].
My attorney has explained that the settlement of my workers' compensation claim by Agreement with the insurance company and my employer means that workers' compensation will not be responsible for any future medical expenses incurred after the date of signing the Agreement.
I also have been told that because I was injured on the job and collected workers' compensation benefits, if I am found disabled by the Social Security Administration and eligible for Medicare health insurance benefits, Medicare may not pay for medical expenses related to my workers' compensation injury.
I understand that this means that if my condition worsens and requires future medical treatment, the cost of this future medical treatment will be my responsibility and Medicare may not be required to pay those expenses because it was a work injury. I understand this even though Medicare will pay other non work medical expenses.
I also understand that since this condition may be considered pre-existing, it is unlikely that any private health care company will insure me for health benefits related to this workers' compensation injury.
I understand that this means that it is likely that any future medical expenses incurred related to my work injury will probably have to be paid by me out of the proceeds of this settlement. My attorney had advised me of this and has suggested that I make appropriate arrangements to ensure that I will have funds available from the proceeds of this settlement to pay any future medical expenses that may arise as a result of this injury.
I understand that the payments that are made to me through this workers' compensation settlement will be considered by the Social Security Administration in deciding on the amount of any Social Security benefit I may receive. I understand that the terms of the workers' compensation settlement are not binding on the Social Security Administration and that Social Security will make their own decision about the amount of my monthly benefits.
I understand that the acceptance of this Settlement Agreement may mean that my Social Security benefits are affected and therefore, reduced, due to the money I receive under this Settlement Agreement.
I understand that there is some risk involved and I elect to proceed and settle this workers' compensation claim, knowing of the possible adverse effect on my Social Security and or Medicare benefits.
I have read the above and have had it explained to me by my attorney in the presence of a witness of my choice who acknowledges that the same was done in their presence on the undersigned date.
Attorney at Law
State of California
County of ________________
I, ___________________________________, a Notary Public for the said County and State, do hereby certify that ___________________________ personally appeared before me this day and acknowledge the due execution of the foregoing instrument.
Witness my hand and official seal, this the ________day of _________, 2000
My Commission Expires:
ADDENDUM _____ - CHARACTERIZATION OF SETTLEMENT PROCEEDS
After negotiation between the parties, the following terms have been reached in regard to the settlement proceeds being received. This characterization of settlement proceeds is filed in conjunction with the Compromise and Release and should be considered a part thereof:
- Total amount of Compromise and Release:__________________________
- Temporary Disability should have been paid to the Applicant between:
(if applicable) and__________________________
- Temporary Disability should have been paid at the rate of $ (if applicable)
- Total Temporary Disability benefits that should have been paid to the Applicant is $ (if applicable) .
- Applicant was actually paid Temporary Disability benefits in the amount of
$ (if applicable) .
- Of the above referenced Compromise and Release amount, $ (if applicable) is being paid to Applicant for Temporary Disability.
- Included in the Compromise and Release, is the sum of $ (put "in dispute" or amount if applicable) to be used for future medical care. In accordance with the recommendation of the treating doctor____________________________.
- After deduction for attorney's fees, medical care and Temporary Disability, the sum of $________________remains. This sum is being paid to Applicant, ___________________________due to a life long Permanent Disability which will interfere with Applicant's ability to engage in gainful employment for the remainder of his/her life. This sum is being paid to Applicant in a lump sum based upon a life expectancy of __________________and payments at the rate of $_____________beginning on _________________________at the rate of $______________per month. This is based upon Sciarotta v. Bowen, 837 F.2d 135, using the "Hartman" formula.
The specific characterization of the settlement proceeds in this matter, as set forth above, are an essential element of the Compromise and Release in this matter and it is specifically requested that the Judge reviewing this Compromise and Release make a specific finding in the Order approval as to the characterization of the benefits set forth in this Compromise and Release.
Attorney for Applicant
WORKERS' COMPENSATION APPEALS BOARD
IN THE STATE OF CALIFORNIA
ORDER APPROVING COMPROMISE AND RELEASE AND FINDINGS OF FACTS
Compromise and Release having been submitted in the above referenced matter, and Order approving having been issued on this date. This Order is filed at the same time with the Compromise and Release approving the characterization of the lump sum settlement amount under the Hartman life-time proration method as approved in Sciarotta v. Secretary of Health and Human Services. The following additional findings to the Compromise and Release are made and is incorporated therein:
(1) That the terms of the Compromise and Release agreement set forth herein are incorporated in whole in this Order approving.
(2) That Applicant ______________________________________will receive, after attorney's fees are deducted, the sum of $________________. That amount is to be construed as follows:
a) $ (if applicable) is to be construed as Temporary Disability benefits that should have been provided during the period of _____________ to ________________.
b) $ (put "in dispute" or amount if applicable) is to be construed as payments for future medical care as deemed necessary by the treating doctors.
c) The lump sum remainder of the Compromise and Release amount is to be construed as periodic payments of Permanent Disability at the rate of $_______________per week for the remainder of Applicant's life time.
- Period Life Table, 1996
- probability 1
- of lives 2
- probability 1
- of lives 2