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The Interplay Between Social Security and Workers’ Compensation Benefits – Part 3

1. Allocation of Future Medical Benefits in Compromise and Release (C & R) Agreements

The extent of the this workers’ compensation offset may be minimized when a claimant resolves her workers’ compensation claim via lump sum settlement. Social Security Ruling 94-2p (01/28/94) determined that any portion of a workers’ compensation (WC) payment designated for medical expenses, or for legal or other expenses attributable to obtaining the WC award is not income. This ruling stated, in pertinent part:

The SSACT at section 1612(a)(2)(B), and regulations at 20 CFR 416.1121(a) provide that WC is unearned income for SSI purposes. Regulations at 20 CFR 416.1123(b)(3) provide for counting less than the amount actually received when part of the amount received is for an expense of obtaining the income.

Regulations at 20 CFR 416.1103(a) provides that reimbursement for certain medical expenses are not income.

POLICY INTERPRETATION: If the Federal or State agency, insurance company, or employer that authorizes or makes a WC payment designates any portion of it for medical expenses, or for legal or other expenses attributable to obtaining the WC award, such portion is not income for SSI purposes. The expenses may be past, current, or future. Any portion of a WC award or payment not designated for such expenses is unearned income.

Social Security Ruling 94-2p (01/28/94).

Allocations of future medical expenses are automatic when the parties have prepared a Medicare Set Aside (MSA) that was approved by the Center for Medicare and Medicaid (CMS). When a case does not fall within CMS’s review thresholds2, the Medicare Secondary Payer Statute, 42 U.S.C. Section 1395(y) still requires Medicare’s interests to be considered. Whether the case is one in which you anticipate your client being eligible in the near future, or it may be decades until you anticipate your client will be eligible for Medicare, it is still important to allocate a portion of a claimant’s workers’ compensation settlement to future medical expenses in order to minimize the workers’ compensation offset because this is an excludable expense, not subject to the Social Security Administration’s workers’ compensation offset calculation. Social Security Regulation, 20 CFR §404.408 provides:

(d) 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 his workmen’s compensation claim, or the injury or occupational disease on which his workmen’s compensation award or settlement is based, are excluded in computing this reduction under paragraph (a) of this section to the extent that they are consonant with State law . . . .” (Emphasis added).

Moreover, Social Security Administration’s POMS Section DI-52150.050 provides, in pertinent part:

Types of Excludable Expenses

  1. Legal expenses
    • Legal expenses paid or incurred by the worker in connection with the [workers’ compensation claim/public disability benefit] WC/PDB claim are excludable.
    • If the worker pays an attorney fee in excess of the WC award specifications, do not exclude the excess amount.
      NOTE: Legal fees paid or incurred by the employer, the WC carrier, or someone other than the claimant are not excludable.
  2. Medical expenses
    • Medical expenses paid, incurred, or to be incurred by the worker in connection with the WC/PDB claim are excludable and often are paid out of compensation or amounts otherwise due the worker.
    • Verified medical expenses in addition to the amount shown in the award are excludable.
    1. Future medical expenses
      Future medical expenses are:
      • Excludable, if specified in the WC/PDB award. For future medical expenses designated as Medicare Set-Aside Arrangements (MSA), see DI 52150.050C.2.b. (in this section).
      • Not excludable until actually incurred by the worker if they are amounts not specified in the WC/PDB award.
    POMS Section DI-52150.050 C. (emphasis added).

2. Social Security Offset Language for C& Rs involving Annuities

When resolving a workers’ compensation claim through an annuity or periodic payments, it is still possible to allocate the value of the annuity over a claimant’s life expectancy, rather than at the time the payments are actually received. However if the language in the agreement does not clearly state that the claimant had the option of resolving her case via lump sum, but opted for an annuity, than the SSA will allocate the WC benefits based upon the actual periodic payments received by the Claimant. Social Security Ruling 81-32 elaborated on the appropriate workers’ compensation offset calculation in the context of an annuity as follows:

Section 224(a) of the Act requires that offset be based upon WC benefits which are “actually paid”. It is the position of the Social Security Administration (SSA) that where the WC 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.

A worker’s mere agreement to a WC settlement in itself is not an exercise of his or her option. Therefore, if a worker agrees to a WC award which does not give him or her an option to receive a lump sum in place of an annuity, it is the annuity payments which are the proper amounts to be used in computing the offset; and where the worker does not have control over the manner or timing of the annuity payments, they are cause for offset only as of the time that they are actually paid to the worker.

In the case in question, the annuity is payable in lieu of periodic benefits. The WC award does not give the worker an option of taking a lump sum in place of the annuity, and the worker does not have dominion and control over the time and manner of the annuity payments. Therefore, offset should be computed on the basis of the annuity payments as of the time that they are actually paid to the worker.

SSR 81-32. 3

Therefore, when resolving workers’ compensation cases involving annuities, in order to maximize a Claimant’s Social Security Disability income, the C and R agreement should explicitly state that the Claimant had the option of resolving her case via lump sum, but elected an annuity. If such language is included than the SSA will pro-rate the settlement by dividing the purchase price of the annuity over the Claimant’s life expectancy, rather than computing the offset on the basis of the annuity payments as of the time they are actually received.

C. Conclusion

In summary, when representing workers’ compensation claimants who are either receiving or anticipate receiving Social Security benefits, it is important to strategize on an ad hoc basis in order to secure the most beneficial economic outcome. Therefore, just as an employer has an obligation to send Employee Report of Benefits forms (LIBC 756) to claimants to investigate their receipt of benefits that may be subject to Section 204(a) offsets, claimant’s attorneys should be periodically asking their clients whether they are receiving such benefits. Given the fact that a Claimant must opt in to receive early Social Security old age benefits, once she reaches his maximum retirement age, it is important to discuss the impact of the Claimant’s receipt of benefits at various ages as well as its potential effect on the Claimant’s workers’ compensation income. Additionally, when resolving cases, the practitioner should allocate a portion of Claimant’s settlement to future medical benefits, regardless of whether a Medicare Set-Aside is appropriate in order to maximize the claimant’s Social Security Disability income. Finally, when resolving cases through periodic payments, i.e. annuities, rather than via lump sum, the C and R agreement should explicitly state that the Claimant had the option of entering into a lump sum, but opted to take an annuity so that the purchase price of the annuity or the total value of the settlement may be pro-rated over the Claimant’s life expectancy, rather than the time when the payments are actually received.

By Marla A. Joseph, Esquire ©

2 A Workers’ Compensation Medicare Set-Aside (WCMSA) meets the Center for Medicare and Medicaid (CMS)’s criteria for review when the following thresholds are met:

  1. The claimant is currently a Medicare beneficiary and the total settlement amount is greater than $25,000; OR
  2. The claimant has a “reasonable expectation” of Medicare enrollment within 30 months of the settlement date and the anticipated total settlement amount for future medical expenses and disability/lost wages over the life or duration of the settlement agreement is expected to be greater than $250,000. (See May 11, 2011 Memorandum of CMS Acting Director of the Financial Services Group and the July 23, 2001, July 11, 2005, and April 25, 2006 procedure memoranda regarding CMS’ Workers’ Compensation Medicare Set-aside Agreement (WCMSA) proposal review thresholds, which can be found on CMS’ Web site at:

3 “Although Social Security Rulings do not have the full force and effect of the law, in accordance with Section 402.35(b)(1) of the Social Security Administration Regulations (20 CFR Part 402), they are to be relied upon as precedents in adjudicating other cases.” See

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