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Worker's Compensation Offset

Special Update

by David R. Bryant

[Note: Also see Memo to Workers Compensation Lawyers Association and Letter to Commissioner Apfel]




is edited by
David A. Bryant & Associates, attorneys concentrating in Social Security Disability Benefits Law

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In the past, a Settlement of a workers’ compensation claim before the Industrial Commission offered an opportunity for enhancement of benefits to clients who were entitled to Social Security disability. Several methods existed to utilize language that diminished or eliminated any reductions in Social Security monthly checks. These were/are commonly called: The Spread, The Shelter, and The 81-20 Plan. In addition, some petitioners would dismiss the WC claim and "Gross Up" the P.I. (Third Party Action) in a Global Settlement.

The Act (42 USC §424a) mandates Social Security to reduce benefits to disabled persons who also receive WC if certain conditions are met. Essentially, Congress tried to eliminate injured workers from collecting two checks that added up to more than his/her prior take home pay. This was pegged at 80% of the best earnings year in the last five full years, commonly called "The Cap". If Wage Earner/Petitioner earned $60,000.00 in 1995, just prior to a February 1, 1996 truck accident, then Wage Earner/Petitioner (and family) could receive up to $48,000.00 a year in combined TTD and DIB (Disability Insurance Benefits). This is known as the 80% Rule. (80% of $60,000.00 = $48,000.00).

The Rules (20 CFR §404.408 et seq.) previously allowed for several methods to calculate the Offset. The one most favorable to Petitioner was used by SSA. The current proposal [62 Fed. Reg. 46682-686 (September 4, 1997) See Attached] changes this. No longer will the "rate specified in the Award" be used to calculate the Offset. Rather, in Illinois, Social Security will use 2/3 of AWW as the "rate". If such a rate is disputed and payments stopped, then the "periodic rate paid prior to the lump-sum award" will be used. If nothing was ever paid in TTD, then the Illinois "maximum weekly rate in effect at the time of the injury….."

The lifetime spread (even the spread to age 65) is out the window if these Proposed Rules are adopted. The comment period ends 11/3/97.

What to do? (1) Comment [See: Memorandum]

  1. Should I push through Settlements before the effective date of the new Rules?
  1. It’s being done. See: Lawyers Weekly (10/6/97) "Workers Compensation Claimants Hurt by New Federal Rules: Lawyers Rush to Settle Cases". But ONLY if client is made aware that these "new" rules are characterized as a clarification of existing policies. They could be applied retroactively, especially in lifetime spreads. My guess is they won’t go back beyond 9/4/97 Settlements. If no other options are available, use of spread language (to age 65, if possible) can’t do much harm if the Settlement is approved PRIOR TO formal adoption of the new Rules. You are at risk if the client isn’t informed of these changes.
  1. What’s left if these Rules are adopted?
  1. Social Security allows an Offset against the Net to Petitioner. Thus costs and attorneys fees "and a reasonable estimate of amounts to be incurred by the individual for medical and/or legal expenses in connection with the claim... are excluded in computing the reduction". These include "a reasonable estimate…of future medical expenses" as supplied "by the individuals physician".

The shelter is still an option

Future medical expenses of a reasonable nature includes:

1. Medicare premiums: [change each year 1997= $ 43.80/mo]

2. Supplemental Medicare Policy premiums ["H" plan from $200 to $300/mo]

3. Annual Medicare deductible of $ 760.00 + $100.00/yr over yrs

  1. Co-Insurance Cost to Petitioner ($190.00 daily hospital for days 61-90 and all charges after 90 days unless lifetime reserve days available; then $380.00 co-pay) (20% of doctors bills).

5. Physical therapy, counseling (family), anticipated surgery (20%), blood transfusions, etc. [Non Medicare covered items if no Medigap Insurance purchased].

These related, unreimbursed medical expenses may be included in the Settlement. Thus, in a $100,000.00 Settlement for a 50-year-old married trucker with non-working wife and two children under 18, use language as follows [If likely to receive or is receiving reduced DIB]:

In lieu of ……… the sum of $100,000.00 subject to reductions of

(1) Costs $ 2,000.00

(2) Attorney Fee $20,000.00

(3) Unreimbursed Future Medical Expenses

(a) Medicare Premiums @ $720.00*/yr over 15 yrs $10,800.00

(b) Medicare deductibles @ $600.00*/yr over 15 yrs $ 9,000.00

(c) Co-Ins. (Out of Pocket) @ $300*/yr over 15 yrs $ 4,500.00

The Net to Petitioner is theoretically reduced from $78,000.00 to $53,700.00. Assuming Petitioner (and Family) are receiving Maximum benefits from Social Security ($1,800.00/month) and that Petitioner made $60,000.00 in 1995 (AWW= $1,153.85). Also assume he was paid maximum TTD of $706.56/wk since the 1996 accident. [NO Third Party Action pending].

How would this affect our client:

THE MONTHLY CAP [$48,000.00 ¸ 12 months] $ 4,000.00

(less MONTHLY WC [$706.56 x 52 ¸ 12] $ 3,061.60

MAX SS/DIB allowed under new rule $ 938.40

The client would get the $938.40 per month instead of the $1,800.00* since the $78,000.00 would be eaten up by the offset over 90+ months ($1,800.00 less $938.40 = $861.60). If the $78,000.00 is reduced to $53,700.00 the recovery time is reduced commensurately from 90+ months to 62+ months. (7 years to 5 years). Not much, but something.

Please note, the physician and insurance companies, not Petitioner’s attorney, are sources of information under the new Rules. This should be changed.

NOTE: Before using any spread or shelter language, always calculate the 80% Rule. Many clients in the $50k plus salary range will have NO OFFSET simply because the 80% Rule works favorably for higher income persons. Remember, Social Security stops counting wages when taxation stops. The client must furnish Social Security Administration with evidence of high earnings if relevant. Also, the New Rules will not count money earned at another job not taxed under Social Security. (i.e. Chicago policemen [not taxed] working Security [taxed]) in calculating a base to multiply by the 80%. Thus a $20,000.00/year security job cannot be added to a $40,000.00/year policeman’s salary to yield a base of $60,000.00 in calculating the Offset.

  1. Isn’t there some other ways to avoid or minimize The Offset?
  1. Sure.
    1. The 81-20 Plan is still viable. [See: Prior literature]. With low interest rates, it’s not as attractive as back in the 70s and part of 80s. BASICS: Respondent imposed, interest only, irrevocable annuity to be paid to age 65, death, or return to work for 10 months.
    2. The Balloon. EXPERIMENTAL. UNTESTED. COULD BE HAZARDOUS TO HEALTH. In the situation where the client:
    1. didn’t make a lot of money (i.e. $20-$40k/year)
    2. dead bang winner for SSA/DIB and P.T.D. (and settlement)
    3. paid into a 401(k), IRA, SEP or other deferred tax retirement program.
    4. would suffer under an Offset situation (i.e. 40 years old, married, two young children).
    5. significant dollars on the table (or expected)

CONSIDER: In the year of injury

    1. taking money out of the IRA – just enough to inflate current year earnings to the 80% Rule cutoff
    2. paying any taxes +/or penalties on these "wages"

      How it might work. John Jones has $30,000.00 in an IRA account built up over 15 years of $2,000.00 annual contributions. He is seriously injured on 6/1/96 in a compensable accident that will end his working career. On 7/4/96 his spouse retains you. After gathering information, you determine that The Offset would probably reduce his SSA/DIB by $861.40 each month.

      How much of the $30,000.00 can/should be taken out of the IRA (with tax counsel review) to eliminate this "Offset":

      $ 861.40/month Recovery

      x 12 months x 12 months

      $10,336.80 Annual Recovery

      ¸ 80%

      $12,921.00 AMOUNT/IRA

      This suggests a $13,000.00 backward adjustment to the existing/projected 1996 W-2 earnings up to the date of the accident.

      This is one method. Others exist to calculate the taxable wages needed to maximize the 80% Rule effect on any Offset.

    4. In viable Third Party Actions, dismiss the WC claim for $1.00 and "gross up" the P.I. Settlement by an amount comparable to the Gross to Petitioner with appropriate adjustments.

DO NOT go across the street and file a Civil Action, Answer, and Settlement with Release and Satisfaction ("the E. St. Louis Move"). I suggest such attempts skate too close to the Abyss of the Glacier’s Chasm. (i.e. Fraud).

DO NOT "Net" the Civil Action Settlement. Make sure any payback of WC prior payments is clearly shown.

  1. My client will get both WC and SSA/DIB but we are arguing with Respondent about the AWW. What should I do?
  1. You may wish to consider accepting a lower AWW/TTD rate in return for other considerations (i.e. medical/vocational payments) since the rate of TTD paid will be used as a basis for the Offset. Raising the TTD may be a hallow victory unless other considerations are present.
  1. My client has not been paid any TTD yet and Respondent is offering a substantial Settlement. Can I set a TTD rate of $68.00/week, cut one check to Petitioner, and then settle?
  1. Technically, the language seems to allow this. But I would not like to defend it. If you try it, keep me posted.
  1. Client was paid TTD and is getting SSA/DIB subject to an Offset. I am going to settle based on the PPD Rate (which is lower than the TTD Rate). Will SSA use the PPD Rate in recalculating the amount Offset and raise my client’s DIB check?

A. Good question. Don’t know. SSA should use the PPD Rate. I will keep you posted. [Thanks to Anesi, Ozman, Rodin, Ltd. for the question].

As most of you know, I have taken a relatively conservative stance in issues relating to WC and SSA/DIB over the last 20 years. Some were justified; some, not. If you decide to be aggressive, I suggest SSA’s learning curve will cause a reaction in 3 to 5 years. Good luck during the next 5 years.


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