Workers’ compensation, which provides financial support for employees injured on the job, can impact the amount you receive from Social Security. Specifically, if you’re receiving workers’ comp, your Social Security Disability Insurance (SSDI) benefits might be reduced to prevent your combined income from exceeding certain limits. This interaction is designed to balance the benefits you receive, ensuring that the support is fair and does not exceed predetermined thresholds.

If you need help planning around Social Security, consider speaking with a financial advisor.

Workers’ Compensation vs. Social Security Disability Insurance (SSDI)

Workers’ compensation, a state-regulated insurance program, offers benefits to workers who sustain injuries or illnesses related to their job. This coverage includes medical expenses, rehabilitation costs and lost wages. Workers’ compensation is designed to help workers get back on their feet without the need for litigation against their employers. Each state has its own rules and regulations governing workers’ compensation benefits, which can vary significantly.

Social Security Disability Insurance (SSDI) is a federal program that provides financial assistance to individuals who are unable to work due to a severe, long-term disability. To qualify for SSDI, individuals must have worked and paid into the Social Security system for a certain number of years, depending on their age. SSDI benefits are based on the worker’s average lifetime earnings and are intended to provide a safety net for disabled workers who cannot engage in substantial gainful activity.

Eligibility for workers’ compensation is generally automatic upon sustaining a work-related injury or illness, with benefits calculated based on the worker’s wages at the time of the injury. In contrast, SSDI requires a thorough application process, including medical documentation and a waiting period, with benefits calculated based on the worker’s lifetime earnings.

Furthermore, Social Security disability benefits are reserved for people who have a medical condition “that’s expect to last at least one year or result in death,” according to the Social Security Administration (SSA). This distinction emphasizes the difference in scope and function between the two programs.

How Workers’ Compensation Impacts SSDI

A worker who was injured on the job fills out paperwork to file for benefits.

When you receive workers’ compensation, it can impact the amount of SSDI benefits you are eligible to receive. The SSA reduces your SSDI benefits if the combined amount of workers’ compensation and SSDI (plus any other public benefits you may receive) exceeds 80% of your average current earnings before you became disabled. This is known as the workers’ compensation offset.

It is important to report any workers’ compensation benefits to the SSA promptly. Failing to report these benefits can result in overpayments, which the SSA will require you to repay. Keeping the SSA informed helps avoid any potential complications or financial penalties.

Calculating Average Monthly Earnings

  • The average monthly wage used to determine your un-indexed disability primary insurance amount.
  • The average monthly earnings from employment and self-employment during the five consecutive years with the highest earnings after 1950.
  • The average monthly earnings from the single year with the highest earnings from employment. This year can be the year your disability started or any of the five years immediately before it.

If your total benefits exceed the 80% threshold, the SSA reduces your SSDI benefits by the amount necessary to bring your total benefits within the limit. This reduction continues until your workers’ compensation benefits end or the month in which you reach the full retirement age.

How It Works

A man in a wheelchair rehabs from a workplace injury that he suffered earlier in the year.

Consider a construction worker injured on the job. They qualify for $1,200 per month in workers’ compensation and $800 per month in SSDI. According to Social Security rules, the combined benefits from both programs cannot exceed 80% of the worker’s average monthly earnings before the injury.

The construction worker’s pre-injury average monthly earnings were $2,000 per month, their maximum combined benefit would be $1,600.

The combined workers’ compensation and SSDI benefits initially total $2,000 ($1,200 + $800), which exceeds the $1,600 limit. Consequently, the construction worker’s SSDI benefits will be reduced by $400, resulting in a monthly SSDI payment of $400. Therefore, their benefits are as follows:

  • Workers’ compensation: $1,200
  • Reduced SSDI: $400
  • Combined monthly benefits: $1,600

Does Workers’ Compensation Affect Retirement Benefits?

Workers’ compensation does not directly reduce Social Security retirement benefits. These two benefit types operate independently. However, if you are receiving both, it’s important to report your workers’ compensation benefits to the SSA.

While workers’ compensation benefits don’t reduce Social Security retirement benefits, they may affect the timing and strategy of when you choose to claim your retirement benefits. For example, a person who’s receiving both workers’ compensation and SSDI may consider switching to retirement benefits as early as age 62 to avoid the reduction. However, doing so will result in up to a 30% reduction in lifetime benefits.

Bottom Line

Managing workers’ compensation and SSDI benefits requires careful attention to reporting and calculating your combined income. Workers’ compensation benefits can reduce your SSDI payments if the total exceeds 80% of your average current earnings. Ensure you promptly report any workers’ compensation to the SSA to avoid overpayments and keep your benefits within the permissible limits.

Tips for Claiming Social Security

  • SmartAsset’s Social Security calculator can help you estimate how much you benefits will be at different claiming ages. These estimates can help you make a more informed decision surrounding when to receive your benefits.
  • A financial advisor can help you plan for Social Security and incorporate your benefits into a larger retirement income plan based on your assets and needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/SBDIGIT, ©iStock.com/bymuratdeniz, ©iStock.com/Hispanolistic

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