Issue #12     April 25, 2005



By John J. Campbell, Esq., CELA, MSCC



            In any worker’s compensation (WC) settlement including a settlement of future wages, (“indemnity”), where the claimant also qualifies for Social Security Disability Income (SSDI), it is possible that the settlement could adversely affect the claimant’s SDDI benefits.  This is because the Social Security Act, (42 U.S.C. § 424a), and the Social Security regulations, (20 C.F.R. §404.408), each contain a provision requiring a reduction in SSDI benefits if the claimant’s combined SSDI and WC benefits total more than 80% of the claimant’s average current earnings.  This reduction, often referred to as the “SSDI offset”, stops when the claimant reaches age 65 and his or her disability benefits are replaced by Social Security old age/retirement insurance benefits.  The offset is not required if state law requires an offset in WC wage benefits for a claimant entitled to SSDI, rather than an offset in SSDI benefits.[1]  


            In the majority of states, receipt of WC wage indemnity benefits by a claimant can result in a significant offset to the claimant’s SSDI benefits.  Receipt of WC indemnity benefits will directly reduce the SSDI payment on a dollar-for-dollar basis, to the extent the claimant’s combined WC and SSDI benefits exceed eighty percent (80%) of his or her average current earnings.  In the 11 reverse offset states, SSDI benefits will be unaffected, but the claimant’s WC indemnity benefits will be reduced, based on the particular state’s offset provisions.


            If the claimant has a spouse or children who are receiving dependents’ SSDI benefits based on the claimant’s earnings record, the offset will affect those dependents’ benefits as well.  In such cases, the SSA will apply the offset first to the total family benefit, then to the claimant’s benefit.  Since the family’s total benefits from SSDI and WC cannot exceed 80% of the claimant’s average current earnings, the resulting offset can be quite large.  In reverse offset states, the total SSDI benefits of the claimant and any SSDI benefits being paid to the claimant’s spouse and children can be used to calculate the amount of the claimant’s WC indemnity offset.  See, Sundby v. City of St. Peter, 693 N.W.2d 206 (Minn. 03/17/2005).


            A claimant is required by law to notify the Social Security Administration, (SSA), if he or she is receiving WC indemnity payments. Therefore, the WC claimant’s regular monthly SSDI benefits should already reflect the offset, if any, for WC indemnity payments the claimant is currently receiving.  If the claimant’s WC settlement includes settlement of the claimant’s future indemnity benefits, the indemnity portion of the settlement can also result in an offset in future SSDI benefits. 


            Where indemnity payments will be received on a monthly basis, the monthly payment amounts will be used to calculate the offset.  To determine the SSDI offset from a lump sum settlement of a WC indemnity claim, the lump sum portion of the settlement allocated to indemnity is prorated over the number of months the claimant would have received periodic WC indemnity payments if the indemnity benefits had not been paid in a lump sum. 


            The size of the SSDI offset will depend primarily upon the size of the monthly WC indemnity payment (or the prorated monthly amount calculated from a lump sum payment); the amount of the claimant’s average current earnings; and whether the claimant has a spouse or children receiving SSDI based on the claimant’s SSDI eligibility.  A higher average current earnings amount, or a lower monthly WC indemnity amount, will result in a smaller  SSDI offset.  The SSDI offset amount will usually be larger if the claimant’s dependents are also receiving SSDI.


            The regulation provides that the average current earnings will be the highest of three amounts: 1) the average monthly earnings used to calculated the claimant’s SSDI benefit; 2) the claimant’s average monthly earnings from any work the claimant did (including self-employment) that was covered by Social Security for the five highest years in a row after 1950; or 3) the claimant’s average monthly earnings from work or self-employment during the year the claimant became disabled or in the highest earnings year during the five year period just prior to disability.  Whichever of the three calculations under the regulation produces the highest amount will be the one which determines the claimant’s average current earnings amount.  Since the average current earnings amount is based upon historical earnings data, there is not much, if anything, a claimant can do to increase his or her average current earnings.


            However, the manner in which the indemnity portion of the WC settlement is paid and the specific terms of the settlement agreement can affect the SSDI offset amount.  This is because: 1) the SSDI offset is only taken until the claimant reaches age 65; 2) under virtually every state’s WC law, the employer is not normally required to pay indemnity benefits to the claimant past age 65; and 3) the number of payments over which the indemnity is prorated depends upon the manner in which the indemnity is paid and the specific wording of the settlement agreement.


            A settlement agreement could provide that the indemnity portion of the WC settlement be paid in a lump sum; or that the claimant has the option of receiving the indemnity portion of the settlement in a lump sum or an annuity.  If so, the lump sum amount (or the amount used to purchase the annuity) would be allocated by SSA over the period during which the claimant would have continued to receive WC indemnity benefits if not for the settlement. 


            Alternatively, the settlement agreement could provide that the claimant must receive the indemnity portion of the settlement through structured monthly annuity payments over a period of time longer than the claimant would have received WC benefits.  The latter option could result in a smaller SSDI offset and a significant savings to the claimant in the long run, provided that the settlement does not permit the claimant the option of receiving the indemnity payment in a lump sum.


            For example, a 45 year old claimant receives monthly indemnity payments from WC of $208.33. The claimant’s average current earnings amount, as calculated by SSA, is $850; and she is eligible for an SSDI benefit, before the offset, of $650.  The claimant’s combined WC indemnity payments and SSDI benefits are $858.33, which exceeds 80% of her current earnings amount by $178.33. This $178.33 will be offset from her SSDI benefits each month.  


            The claimant decides to settle her WC indemnity claim for a lump sum payment of $50,000. The $50,000 payment represents a commutation of the indemnity payments she would have received over the next 20 years until reaching age 65 under the state’s WC laws.  Under the Social Security regulations, the $50,000 is allocated over the future 20 year WC benefit period, resulting in a future monthly allocated WC indemnity amount of $208.33.  Her combined WC indemnity and SSDI benefits would remain the same and her SSDI offset would remain at $178.33.


            If the same claimant agreed to a settlement providing that she has no option but to receive her $50,000 WC indemnity settlement in monthly annuity payments that would continue until she reached age 75, those payments would only be $138.89 per month.  Since she will no longer receive SSDI after age 65, the last ten years of annuity payments will not be counted in determining her SSDI offset.  As a result, her combined monthly SSDI and WC indemnity benefits will decrease after settlement to only $818.89, which will only exceed 80% of her current earnings amount by $138.89. Thus, her monthly SSDI offset will be $39.44 less than if she received her settlement in a lump sum. This represents an overall savings of $9,465.60 to the claimant due to the reduction in her monthly SSDI offset amount.


            The claimant’s savings could be increased even more through a structured settlement providing for monthly annuity payments until age 65 in an amount calculated to result in the lowest possible offset during that time.  The structured settlement could then provide for the balance of the claimant’s $50,000 to be paid in larger periodic payments from a separate qualified annuity after age 65.  The claimant’s overall savings would increase; and she could receive full payment of her structured settlement well before age 75. 


            In some states, the employer’s obligation to pay indemnity is limited to a shorter period of time.  Indemnity benefits may be limited to a set period of months or years, regardless of the claimant’s age.  In these states, the savings realized from using a structured annuity to settle indemnity can be even more dramatic. 


            For example, if the WC laws in a claimant’s state only require indemnity benefits for a period of 120 months, a lump sum settlement of indemnity would be prorated over that period of time to calculate the SSDI offset.  If the settlement were paid out in monthly payments from an annuity that will continue until the claimant reaches age 65 or beyond, only those payments scheduled for the remainder of the 120 month indemnity period would be counted in determining the claimant’s SSDI offset amount.  Further, if the claimant will reach age 65 during the 120 month indemnity period, only those payments scheduled to be paid before age 65 will be counted.


            It is extremely important that the WC settlement agreement, which is approved by the state WC board, contain a reasonable allocation and apportionment to indemnity.  If the claimant on SSDI is already eligible for Medicare, or if the entire settlement, including indemnity, is valued at more than $250,000, there must be a reasonable allocation to future medical expenses as well.


            It is also important, because of the impact on the proration of the indemnity portion of the settlement, that the settlement agreement be specific about whether the amount allocated to indemnity is to be paid by lump sum or annuity; the amounts and frequency of any annuity payments; and the period over which any annuity payments will be made.  Finally, if indemnity is to be paid through an annuity, the settlement agreement should state that the claimant does not have the option of receiving the indemnity settlement in a lump sum.  In any of the 14 states where the WC carrier takes the offset, the settlement agreement should make it clear that the amount in the settlement apportioned to indemnity already reflects the offset.


            Any portion of the WC settlement that represents payment of expenses other than indemnity, such as past or future medical expenses and attorney’s fees and costs, are excluded from consideration for the offset.  However, SSA will require that the allocations in the settlement be reasonable.  If the non-indemnity allocations are unreasonably high (and, as a result, the indemnity allocation is unreasonably low), SSA can treat the entire settlement as indemnity. 


            In settlements where Medicare’s interests must be reasonably considered, a failure to allocate a reasonable amount from the settlement to future medical expenses can also result in Medicare allocating the entire settlement to future medical expenses.  Imagine the disastrous result if both SSA and Medicare were to impose their own allocations to the settlement proceeds: the entire settlement would be considered to be indemnity for SSDI purposes; and the entire settlement would be considered to represent payment for future medical expenses for Medicare purposes!   




            In any WC settlement for a disabled claimant on SSDI, where the settlement will contain a wage indemnity component, very specialized issues arise that could have profound effects on the claimant’s current and future access to SSDI benefits.  Every catastrophic WC settlement should be reviewed and analyzed early in the settlement process by counsel familiar with this area of the law.  This will ensure that the settlement does not needlessly jeopardize the claimant’s SSDI benefits; and that the settlement will be structured and apportioned properly to maximize the advantage to the claimant of both the settlement and any available public benefit programs.


End Notes


[1].     The laws of 14 states require a reduction in state W.C. benefits rather than SSDI benefits. These “reverse offset” states are: California, Colorado, Florida, Louisiana, Minnesota, Montana, Nevada, New Jersey, New York, North Dakota, Ohio, Oregon, Washington and Wisconsin. Social Security Administration, Program Operations Manual, POMS §DI 52001.080(3)(a).



         John J. Campbell, the founder and principal attorney of the Law Offices of John J. Campbell, P.C., has practiced law for 19 years and has practiced in the area of Medicare Set-Asides since 1996.  Mr. Campbell is certified as an Elder Law Attorney by the National Elder Law Foundation;* and is a Medicare Set-Aside Consultant Certified (national certification through the Commission on Health Care Certification).*  Mr. Campbell is licensed to practice law in Colorado and is also licensed and on inactive status in Missouri.  He is a member of the Colorado Bar Association (Trust & Estate Section and Elder Law Section), the Arapahoe County Bar Association, the Missouri Bar Association, the National Academy of Elder Law Attorneys, The National Structured Settlements Trade Association and the National Alliance of Medicare Set-Aside Professionals.  His areas of concentration include elder law; estate, disability and long term care planning; probate; guardianship and conservatorship; Medicare, Medicaid, Medicare Set-Aside Arrangements, and the preservation of public benefits in catastrophic third party liability and worker’s compensation settlements.  Mr. Campbell has published numerous articles and has presented numerous seminars on issues relating to Medicare Set-Aside Arrangements across the country.


*The State of Colorado does not certify attorneys as experts in any field.



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