Chapter 14 The Social Security/workers' Compensation Offset

• Library: The Law of Workers’ Compensation Insurance in South Carolina (SCBar) (2019 Ed.)

Chapter 14 The Social Security/Workers' Compensation Offset

I. Introduction

This chapter addresses the relationship between benefits available under the South Carolina Workers' Compensation Act and the federal Social Security Act. "Congress drafted the social security statutes with the expectation that claimants could receive both workers' compensation and disability benefits for on-the-job injuries."¹ The coordination between these two systems is essential to making intelligent decisions in any case where there is concurrent coverage.

II. The Basics

The Social Security Act provides for several different types of monetary benefits, including (1) retirement benefits,² (2) disability insurance benefits (SSDIB),³ (3) Supplemental Security Income (SSI) for disabled adults and children,⁴ and (4) survivor's benefits for qualifying individuals.⁵ When an employee receives both SSDIB under federal law and workers' compensation (WC) benefits under state law, federal law calls for an offset between the two.⁶ The offset applies only against SSDIB and disabled widows' benefits and not against any other form of Social Security benefit, such as retirement.⁷

Under the offset formula, 42 U.S.C. § 424a reduces federal SSDIB if the combined receipt of SSDIB and WC exceeds the higher of (1) 80% of the individual's "average current earnings;" or (2) the individual's "primary insurance amount" or PIA, which is the maximum amount of SSDIB the individual would have received even if a work-related condition were not involved.⁸ Congress has amended the offset statute several times over the years.⁹ Although Congress repealed a similar offset provision in 1958, the forerunner of the current version reappeared in 1965.¹⁰

The reinstitution of the offset was triggered by data submitted to legislative committees which showed that in the majority of the states, the typical worker who was receiving workers' compensation and federal disability benefits actually received more in benefits than his pre-disability take-home pay. . . . This was thought to cause two evils: first, it reduced a worker's incentive to return to the workplace and hence impeded rehabilitative efforts; and second, it created fears that the duplication of benefits would lead to an erosion of state workers' compensation programs.¹¹

"Data submitted to the legislative committees showed that in 35 of the 50 States, a typical worker injured in the course of his employment and eligible for both state and federal benefits received compensation for his disability in excess of his take-home pay prior to the disability."¹² For this reason, Congress capped the combined benefits at 80% of the average current earnings to encourage beneficiaries to return to work, instead of remaining out on disability.¹³

To implement 42 U.S.C. § 424a, the Social Security Administration promulgated 20 C.F.R. § 404.408(d), which "simply mirror[ed] the statute and provide[d] no insight into its ultimate interpretation."¹⁴ The Social Security Administration has also issued administrative and acquiescence rulings to flesh out its regulatory interpretation with the goal of achieving consistent practice standards when imposing the offset, even though these secondary interpretations do not have the force and effect of law.¹⁵ Over the years, Congress has toyed with eliminating the offset, but has never yet done so.¹⁶

To understand how the offset works, one must first understand that there is state law and there is federal law, and this distinction leads to some friction. The first friction occurs between the concepts of "average weekly wage" and "average current earnings." South Carolina Code Ann. § 42-1-40 defines the term "average weekly wage" and is a state-law concept used to measure an injured employee's benefit under the South Carolina Workers' Compensation Act. In contrast, the federal offset statute calculates the offset with reference to "average current earnings" or ACE, which might or might not match the earnings used in the "average weekly wage" (AWW) calculation. Thus, to tell an employee that workers' compensation pays 66 2/3% of pre-disability income and that Social Security disability will pay up to 80% of pre-disability income would not be accurate advice in most cases, because the two percentages are measured by different standards.

The state percentage might not be congruent to the federal percentage. AWW is generally based on gross earnings during the year prior to an injury or onset of an occupational disease,¹⁷ while ACE is based on the beneficiary's taxable income for up to five consecutive years since 1950 in which the earnings were most favorable to the ACE calculation.¹⁸ For example, take a self-employed, but insured, contractor who had gross earnings of $90,000 in the 52 weeks before his work-related injury, but who expensed out most of these earnings on his Schedule C so that his taxable income was only $14,000. His AWW could be based on the $90,000, but his ACE would be based on the $14,000. The limitation of ACE to taxable income results from the language of 42 U.S.C. § 424a, which lists three methods of calculating ACE using

(A) the average monthly wage . . . used for purposes of computing [SSDIB],
(B) one-sixtieth of the total of [the claimant's] wages and self-employment income . . . for the five consecutive calendar years after 1950 for which such wages and self-employment income . . . for the five consecutive calendar years after 1950 for which such wages and self-employment income were highest, or
(C) one-twelfth of the total of [the claimant's] wages and self-employment income . . . for the calendar year in which [the claimant] had the highest such wages and income during the period consisting of the calendar year in which [the claimant] became disabled. . . and five years preceding that year.¹⁹

To protect against inflation, the Social Security Administration recalculates the ACE every three years.²⁰ This is known as the "triennial redetermination."²¹

For years, the Social Security Act has defined "wages" as "remuneration paid after 1950 for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash. . . ."²² The suggestion that "wages" covers more than taxable income encouraged litigation that tried to include undocumented and untaxed wages into primary insurance amounts for SSDIB that were higher than otherwise suggested by the beneficiary's earnings reports and tax history.²³ In response, federal courts limited "wages" to exclude non-covered earnings and to include only that income upon which the beneficiary paid Social Security taxes.²⁴ Non-taxable income has not qualified as "wages" for purposes of ACE since this litigation petered out nearly two decades ago.²⁵

The important thing to remember is that AWW and ACE are calculated in different ways. One calculation takes place under state law, and the other under federal law. They are not congruent. As a consequence, the interval between the 80% ACE and the amount of workers' compensation received may be greater or lesser — or even nonexistent — due to the relative positions of ACE to AWW. Nevertheless, the offset calculation in 42 U.S.C. § 424a uses both of these concepts and advocates have to find a way to compare the two. This is easy, since only one of three patterns of facts will exist when it comes to the offset. These patterns involve facts where (1) the ACE and AWW are equal, (2) the ACE is greater than the AWW, or (3) the ACE is less than the AWW. Mastery of each of these variations will lead to full understanding of how the offset works.

A. Fact Pattern #1

Fact Pattern #1 in column 1 assumes that the ACE under federal law is equivalent to AWW under state law. Column 1 — highlighted in the following chart — represents these facts:

		1	2	3
		Fact Pattern #1 (ACE = AWW)	Fact Pattern #2 (ACE > AWW)	Fact Pattern #3 (ACE < AWW)
A	ACE	$1,000	$2,000	$200
B	AWW (per month)	$1,000	$1,000	$1,000
C	80% ACE	$800	$1,600	$160
D	Compensation rate (per month)	$667	$667	$667
E	PIA	$500	$700	$300
F	SSDIB received after offset (80% ACE - WC rate)	$133	$700	$0
G	Amount of taxable income (=PIA)	$500	$700	$300
H	Total amount received (WC + SSDIB):	$800	$1367	$667

As you can see, Fact Pattern #1 deals with some of the concepts already encountered in the basic offset formula. For example, one has already learned that (1) the ACE (the $1,000 in box A1) is calculated by the Social Security Administration using one of the three methods in 42 U.S.C. § 424a(a), (2) the offset statute multiplies the ACE by 80% (in box C1) to determine the maximum receipt allowed from both periodic workers' compensation and federal SSDIB, and (3) state law controls the calculation of AWW (in box B1). Because 42 U.S.C. § 424a looks to the monthly amount of periodic workers' compensation, however, the AWW should be converted to its monthly equivalent by multiplying it by 4.33 weeks.²⁶ The above charts therefore represent monthly receipt of workers' compensation, not weekly amounts. Going back to the concepts we are familiar with, the compensation rate (in box D1) is two-thirds of the AWW.²⁷ The PIA or "primary insurance amount" (found in box E1) represents the amount of SSDIB that the employee is normally entitled to under federal law even in the absence of a work-related injury or disease.

Applied to Fact Pattern #1, the basic offset formula subtracts the monthly amount of workers compensation of $667 (box D1) from the 80% ACE of $800 (box C1) to leave a difference of $133. This $133 is the amount of SSDIB received by the employee after the offset is applied (box F1). All in all, the employee receives a total of $800 each month (box H1) — $133 from SSDIB (box F1), and $667 in workers' compensation (box D1) — bringing the employee to the maximum allowed...