How Does Workers' Compensation Affect Disability Benefits?

Some people become disabled as a result of a work-related illness or injury. In these cases, the individual may be eligible for both Social Security Disability Insurance (SSDI) and workers’ compensation benefits. Unfortunately, their total benefits may be limited by what is known as the workers’ compensation offset.

Understanding the Workers’ Compensation Offset

The key to understanding the interplay between the two programs is to understand their separate purposes. Workers’ comp programs, which are run at the state level, seek to compensate workers who suffer job-related illnesses or injuries. These medical conditions may include injuries from accidents, repetitive strain injuries, and mental health issues caused by work stress. Generally, any condition arising directly from job duties may be eligible for coverage, although each state has specific guidelines.

SSDI is a federal program that compensates people with sufficient work histories who are considered unable to work because of their disabilities, regardless of any connection between their work and the disability.

Not all people who qualify for workers’ comp will also be eligible for SSDI. This is because the Social Security Administration (SSA) sets a strict eligibility standard for this disability benefits program. For SSDI purposes, the SSA defines disability as an inability to engage in any substantial gainful activity because of any medically determinable physical or mental impairment(s) that is:

• expected to result in death, or
• has lasted or can be expected to last for a continuous period of at least 12 months.

Workers’ comp eligibility standards are more flexible. In New York State, for example, workers’ comp beneficiaries can be deemed to have total or partial disabilities, and either of these can be classified as permanent or temporary.

Receiving Maximum Benefits

Since monthly benefits tend to be significantly higher under workers’ comp, the SSA imposes a cap on SSDI payments when people receive both types of benefits.

Under the “workers’ compensation offset,” created by Congress in 1965, the total amount from SSDI and workers’ comp cannot exceed 80 percent of the person’s “average current earnings” or the total SSDI received by the recipient’s entire family during the first month receiving workers’ comp, whichever is higher. In most cases, the former is higher.

Average current earnings (ACE) under the workers’ compensation offset refers to the calculation used to determine the maximum allowable amount a person can receive from both SSDI and workers’ compensation benefits. Essentially, ACE is based on the individual's earnings prior to their injury or disability.

To calculate ACE, the SSA looks at the highest earning years of the individual, typically considering the highest-earning five of the past 10 years. This figure represents what the individual was earning before their disability, providing a benchmark for the offset calculation.

When a person begins receiving workers’ compensation benefits, the SSA will compare the total of their SSDI benefits and workers’ comp payments to ensure that the combined amount does not exceed 80 percent of this ACE. If it does, the SSDI benefits will be reduced accordingly. This offset seeks to prevent individuals from receiving more in benefits than they would have earned if they were still working, ensuring that the system remains fair and sustainable.

Understanding ACE is crucial for beneficiaries, as it directly impacts their financial support during a challenging time. By knowing how their benefits are calculated, individuals can better plan their finances and make informed decisions about their future.

An Example of How the Offset Works

Consider the following example. Before she became disabled, Sally’s average earnings were $4,000 a month. Sally is eligible to receive a total of $2,200 a month in SSDI benefits. Sally also receives $2,000 a month from workers’ compensation.

Because the total amount of benefits she would receive ($4,200) is more than 80 percent ($3,200) of her average current earnings ($4,000), her SSDI benefits will be reduced by $1,000 ($4,200 minus $3,200).

SSA Calculations

Average current earnings are based on the highest monthly earnings under one of three formulas.

• The average monthly wage used for determining the SSDI amount
• The average monthly wage based on the person’s five highest earning years in a row
• The average monthly wage based on the single year that the person’s disability began or any one of the five previous years

Monthly Vs. Lump-Sum Payments

Some workers’ compensation claimants receive a lump-sum payment in addition to, or instead of, a monthly benefit. These payments may also reduce the amount they receive in disability benefits through SSDI. However, attorneys will try to draft settlement agreements to minimize the workers’ comp offset.

In most states, the workers’ compensation offset works to reduce the person’s SSDI. Yet 16 states have adopted a “reverse offset” program. In these states, the person’s workers’ comp, rather than their SSDI benefit, will be reduced to meet the SSA’s prescribed formulas.

Do I Have to Apply for Workers’ Compensation?

To receive workers’ compensation, an individual who has incurred a work-related injury or illness must apply for these benefits. The application process can vary depending on where you live.

In general, you need to report the incident immediately to your employer and then file a claim form. States differ in the deadlines they impose for how soon after an incident you need to file your compensation claim. In addition, you will likely need to provide medical records regarding care you sought for your injury.

Workers’ Compensation for Mental Health Conditions

As of 2022, many states across the country covered mental health illnesses resulting “from cumulative, repeat trauma in work.” During the COVID-19 pandemic, for example, this type of compensation applied to many first responders and other front-line workers who were serving in public health roles at the time. Again, benefits for mental health-related claims do vary by state. Visit the United States Department of Labor website for more information.

Consult With an Expert

Gain a deeper understanding by reading the SSA’s guide How Workers’ Compensation and Other Disability Payments May Affect Your Benefits. In addition, consult with a qualified attorney in your area to ensure that you understand the workers’ compensation and SSDI benefits rules specific to your state. For help applying for benefits and ensuring you receive the maximum payment, consider finding a special needs planning attorney near you.

For further reading on this topic, check out the following articles:

• Are Workers’ Comp Benefits Ever Taxable?
• Special Needs Planning Q&A: What Is Workers’ Compensation?
• 2020 Senate Report Highlights Concerns About Disability Claim Backlogs
• Consequences of Not Using a Medicare Set-Aside Account