How Does A Lump-Sum Settlement Affect Social Security Disability?

If you are receiving Social Security Disability Insurance (SSDI or SSD) or Supplemental Security Income (SSI) benefits and you receive a lump sum settlement, it can affect your benefits in a few different ways.

Disability Experts of Florida have extensive experience assisting Social Security Disability and SSI benefits when they expect a substantial lump-sum settlement from a personal injury lawsuit or other legal settlement. It is essential that the settlement documents are prepared with the disability recipient’s benefits eligibility in mind. If not planned properly, the settlement could jeopardize the person’s ability to continue getting Social Security Disability or SSI benefits.

Before finalizing any civil or judicial settlement negotiations, make sure to contact a qualified attorney who is familiar with Social Security regulations and has experience preparing settlement language and trusts when necessary. At Disability Experts of Florida, our team includes a former judge with decades of experience dealing with these issues.

Here Are Some Of The Key Things To Keep In Mind:

1). Impact on SSI Benefits: If you receive SSI benefits, any lump sum settlement you receive will be counted as income in the month that you receive it. This means that it could reduce your SSI benefits for that month or even eliminate them entirely if the settlement is large enough.

Every individual case is different, but many SSI recipients who get large lump sum settlements find that setting up a Special Needs Trust to receive the settlement serves the dual purposes of protecting their eligibility for benefits and allowing them to use the settlement funds to pay for uninsured medical care, home modifications to make their living quarters more accessible, pay for education, travel, and even entertainment.

SSI benefits eligibility is based on the claimant’s financial needs. The needs-based eligibility is determined by the individual’s income and available financial resources. To be eligible for SSI benefits in 2023, an individual can have no more than $2,000 of “countable” resources. There are exceptions for situations where a child is disabled, or the household has more than one disabled individual.

Unless appropriate steps are taken to prepare the settlement agreement with a view to its impact on the person’s SSI eligibility, a large lump-sum settlement would likely cause the recipient to be ineligible for SSI until the money was no longer available.

2). Impact on SSDI Benefits: If you receive SSDI benefits, a lump sum settlement will not affect your ongoing monthly benefits. However, if the settlement is for back pay (i.e., benefits that you were entitled to but did not receive while your claim was pending), it could cause an overpayment if you already received benefits for the same period of time. The Social Security Administration (SSA) will typically subtract the overpayment from your lump sum settlement.

There are legal strategies to ensure that your settlement terms clearly identify the nature of any money covering compensation for lost wages and state when those wages would have been earned. If the settlement clearly provides for the money for wages to cover the rest of the claimant’s working life, then the amount of the wages attributable to any single month would be minimized, requiring less of an offset in benefits.

Again, it is important to get reliable legal advice from a qualified legal professional to guide you through these issues. Disability Experts of Florida can help.

3). Reporting Requirements: Reporting any lump sum settlements to the SSA as soon as possible is important. Failure to do so could result in an overpayment, which you may be required to repay.

Why Are SSDI Benefits Unaffected by Lump-Sum Settlements? 

As explained above, the only effect large lump-sum settlements have on SSD benefits relates to the portion of the settlement representing lost wages. That’s because the recipient’s monthly SSD benefits are intended to compensate them for the lost earnings. The SSA does not permit a recipient to receive double compensation, so if wages are compensated in a lawsuit settlement, the government wants their benefits covering those same wage periods to be returned.

But otherwise, an SSD beneficiary’s monthly income is unimportant to the SSA. Unlike SSI benefit recipients, SSD benefits are not based on need. Instead, SSD benefits are payable to eligible workers and former workers who paid payroll or self-employment taxes into the Social Security System over many years.

Each SSD recipient’s amount is based on their 35 highest income earning years. Those incomes are indexed (adjusted for cost of living) and then calculated to determine the average annual indexed income. Then, the annual income is divided once again to determine their Average Indexed Monthly Earnings (AIME).

Once the AIME is determined, the figure is put through a formula. The resulting final figure is the Primary Insurance Amount (PIA). That’s the amount you receive in SSD benefits each month. The same formula is used to calculate your Social Security retirement benefits.