How Does a Lump Sum Settlement Affect Social Security Disability?

If you’re receiving any form of government benefits and are about to receive a personal injury or a workers’ comp lump sum settlement, you’re probably wondering how does a lump sum settlement affect Social Security disability. 

It’s pretty simple: receiving a lump sum won’t have any bearing on your SSDI benefits, but if you’re receiving SSI benefits, a settlement could cause a decrease in amount or total loss of eligibility. 

Fortunately, not everything is lost, and understanding how does a lump sum settlement affects Social Security disability will help you preserve the maximum amount of benefits. 

Impact of Settlements on Benefits

Since a personal injury case may yield a sizable settlement award, the impact of the settlement on your benefits will depend purely on which Social Security program you’re receiving benefits from. 

With Social Security Disability Insurance (SSDI) benefits, you generally won’t see any reduction in amounts even if you receive a large financial settlement. The reason why these benefits aren’t affected is because they’re primarily based on the employment history of the individual, rather than their current financial situation. 

In other words, if you have a disability and the necessary amount of work credits, you’ll always be eligible because any compensation you receive won’t affect your work credits. 

With Supplemental Security Income (SSI), it’s the opposite. A substantial settlement can minimize your monthly benefits or in the worst-case scenario, completely disqualify you from the program. 

SSI benefits are based on your needs, and you become eligible by demonstrating asset or income limitations. This program requires one to take an income test that determines eligibility. Along with the payments you receive, the income test will include settlement awards. 

Since a settlement increases your financial resources, your SSI payments will most likely decrease. If the settlement leads to your assets exceeding the resource limits of the program, your benefits may be suspended. 

Can You Safeguard Your SSI Benefits After Receiving a Settlement?

Now that you know how does a lump sum settlement affect Social Security Disability benefits, we’re willing to bet that something else is on your mind now -  if it’s possible to protect your SSI benefits. 

The answer is yes. There are different ways to maintain your SSI eligibility status in the event you receive a settlement. 

The most effective methods include:

1. Spending down

This concept refers to spending funds from the settlement on exempted resources to effectively put yourself back in the accepted asset bracket. In order to succeed, you should do this within a month of receiving a lump sum payment. 

These “allowed” expenses include:

• Paying off a mortgage on real estate
• Paying off existing debts such as credit cards or student loans
• Designating the settlement funds for funeral expenses
• Conducting home modifications to accommodate your condition
  
  

2. Transferring the Funds into a Special Needs Trust

Creating a special needs trust and transferring the lump sum you received into the trust will protect your SSI eligibility. You can use the trust to save funds for expenses not covered by SSI, such as legal services or nursing care while you continue receiving benefits. 

Setting up a special needs trust isn’t easy. To avoid mistakes that could cost you your SSI benefits, you should consult an attorney. 

Impact of Workers’ Comp Settlements on SSDI Benefits

If you’re receiving SSDI benefits, you may also receive workers’ comp for the same disabling condition if the disability in question was created by a work-related accident or an illness. For instance, an eye problem referred to as hemianopia can qualify you for disability. One of the common causes of hemianopia is traumatic brain injuries. 

So if you’re eligible for benefits because of this condition, you can also receive workers’ comp if the injury that caused it is work-related. 

It’s important to stress that you can’t receive the maximum amount of both types of benefits, regardless if you receive workers’ comp as a lump sum payment. The combined payments shouldn’t exceed 80% of your average earnings before you were incapacitated. 

Generally speaking, if the combined amount exceeds 80% of your earnings, the surplus will be deducted from SSDI benefits. This is referred to as a benefit offset and it was established to prevent recipients from receiving duplicate lost wages from different programs. 

This is only fair as both workers’ comp and SSDI benefits help eligible individuals receive financial aid that covers a portion of their salary in case of a disabling injury. Yet, this also means that one of the providers will need to lower their payment so that you’re not receiving an amount exceeding 80% of your usual earnings. 

Since receiving a lump sum payment from workers’ comp is the more common method, Social Security will typically convert the workers’ comp lump sum settlement into monthly payments to figure out the benefit offset. 

Can You Minimize the Offset Amount?

Yes. An attorney will help you figure out the right method of reducing the benefit offset to maximize the benefit amounts you’ll keep. 

A legal professional can include specific wording in the workers' comp settlement agreement to identify amounts needed to cover expenses, such as future or current medical expenses. They can then exclude these costs from the lump sum and SSA will subtract them from the settlement before calculating the offset - effectively minimizing the amount. 

Alternatively, your attorney can include a so-called amortization provision into the settlement. It states you’ll spread out the lump sum settlement over your lifetime, which can significantly reduce the offset amount. 

It’s important to stress you can’t add this provision to the settlement documents after the fact. 

Protect Your Benefits

You should never decide against pursuing a valid claim for fear of losing your disability benefits. Knowing how does a lump sum settlement affects Social Security disability helps you prepare for what’s to come. 

An attorney can aid you plan for the future and structure your lump sum settlements in order to minimize their impact on any of the benefits you’re already receiving. 

While you may not like the fact that you’ll have to pay for legal services, if they help you preserve your benefits, any expenditure in this department is more than worth it. 

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.