The following articles have been prepared by the lawyers in this firm. They may be accessed by clicking on the titles of the articles. They are provided for information purposes only and are not intended to be construed as legal advice. You should obtain any legal advices from your legal representative. Please note that the information in any articles regarding Worker's Compensation offset's is relevant to California Worker's Compensation law only and may not be accurate with regards to other State Worker's Compensation Benefit programs.

Workers' Compensation, Social Security Disability and Long-Term Disability Benefits. California Workers' Compensation Inquirer, May, 1996.

The shifting definition of the term "disability" and how the various programs treat receipt of benefits from the other programs. Contains suggestions for maximizing recovery to the injured worker as well as minimizing costs to the employer.

Social Security Offset and Structuring Workers' Compensation Settlements, (C) 1999, Law Offices of Susan R. Wasserman

The ability of an individual to receive his or her full, undiminished entitlement to Social Security Disability benefits can, under certain circumstances, be effected by the receipt of Workers' Compensation benefits. What are those circumstances? What can a farsighted Workers' Compensation practitioner do to protect the client's entitlement to Social Security benefits when settling a Workers' Compensation claim? A good analysis of a complicated subject, containing useful practice tips and specific examples.

The Interaction of Worker's Compensation Benefits on Medicare by Susan R. Wasserman & Jennifer L. Cho Vol. 17, No. 8, California Worker's Compensation Enquirer.

A Social Security disability recipient will eventually qualify for medical coverage under Medicare. Will such persons experience any conflict in coverage as a result of receiving medical benefits through the Workers' Compensation system? When will Medicare be the primary payer? The secondary payer? Is Medicare entitled to a lien? If so, can the lien be compromised? How does Medicare view lump-sum settlements? What is the effect of a settlement which includes a provision for ongoing medical care?

Worker's Compensation Offsets

I. Definitions of Disability;

II. Administration of Programs;

III. How Each Program treats Receipt of Benefits from Other Programs;

IV. Suggestions for Maximizing Recovery to the Worker, and Minimizing Costs to the Employer.

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I. DEFINITIONS OF DISABILITY

A. SOCIAL SECURITY

The Social Security Administration (SSA) administers three distinct programs which must be understood in order to assist an injured worker.

The first program, which most individuals are most familiar with, is SSA's retirement program for workers who are over age 65, with 80% of full retirement available to the age 62 worker. While workers' compensation benefits may produce an offset of an individual's Social Security Disability benefits, there is no reduction in Social Security Retirement benefits due to receipt of workers' compensation benefits. CAVEAT: If an individual is also eligible for Long-Term Disability (LTD) benefits, LTD benefits may be reduced for receipt of early retirement benefits, and an individual on LTD should generally NOT apply for early (age 62) retirement benefits. An individual receives Medicare at age 65 with retirement benefits, but not age 62.

SSA also administers two types of disability benefits, Supplemental Security Income benefits (SSI), which is administered under Title XVI of the Social Security Act. Such benefits are in effect a federal welfare program for aged and disabled individuals, and have a strict need and income and resource test. In California, a needy individual who is receiving no other benefits may receive up to approximately $604.00 of S.S.I. - S.S.I. recipients are immediately eligible to receive medical benefits (stickers) for medical treatment.

The second disability-based program which Social Security administers is administered under Title II of the Social Security Act, and is called Disability Insurance Benefits (DIB). In order for an individual to obtain their Disability Insurance Benefits they must meet the same definition of disability as an S.S.I. recipient, and must have sufficient work to have earned enough quarters of coverage to be considered fully insured by the Social Security Administration (SSA). Generally, an individual must have worked five out of the last ten years before they became disabled at covered employment (employment in which Social Security taxes were taken out of the individual's paycheck) in order to receive Social Security Disability benefits.

CAVEAT: Some individuals (particularly low wage earners) may be entitled to both Social Security Disability and S.S.I. benefits, and the two checks may equal up to approximately $624.00 per month in California. Individuals entitled to DIB (Title II Disability Benefits) are eligible to receive Medicare 29 months after they have been found disabled.

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SOCIAL SECURITY DISABILITY:

In order to receive Social Security Disability benefits, an individual must be totally disabled. Total disability is defined as the inability to perform substantial gainful activity based upon age, education, and prior work experience. The disability must be permanent (greater than 12 months duration) or be expected to result in death. A five-step sequential analysis is utilized in order to determine whether the individual meets the Social Security criteria. Disability need not be work related, and the guidelines are heavily weighed in order to make it more accessible for the older worker.

The nature of the disability, or whether or not it is work related, has no bearing on receipt of benefits. To date, psychological disability is treated equally with physical limitations. Recently, Congress has limited benefits based primarily upon drug or alcohol addition to essentially three years lifetime cap, with the requirement that the individual must be in treatment. Several bills have been proposed by Congress which may even more severely or totally curtail benefits based upon drug or alcohol addition. Benefits are payable permanently if the person remains disabled. If a person does not improve medically, but attempts to return to work, he may be eligible for atrial work period which may allow him to work for up to a total of nine months before terminating his disability benefits.

B. WORKERS' COMPENSATION BENEFITS

Workers' compensation benefits are payable for partial disability, that is less than total disability from any and all occupations. However, before any benefits are payable under workers' compensation, the injury must be work related, or exacerbated by employment. The injury/impairment may be a specific injury or cumulative trauma. Some restrictions have been placed upon recovery for psychological injury in that there must be a measurable and significant correlation to work activity rising to a specific level of impairment. Workers' compensation may compensate for temporary, total or partial disability.

C. EMPLOYER-SPONSORED GROUP LONG-TERM DISABILITY BENEFITS (LTD)

Social Security Disability benefits (SSA) are administered by the federal government. The schedule for workers' compensation benefits is state-mandated, and the appeal process is administered through the state of California, Workers' Compensation Appeals Board. Most employer-sponsored group LTD (Long-Term Disability benefits) benefits are payable through a group insurance policy, or benefits are payable by the employer as in a self-insured plan administered typically through an insurance carrier. The length of disability payments, definitions of disability, provisions for offset for receipt of workers' compensation or Social Security Disability benefits vary from company to company, and even vary within the plans provided by a single employer. CAVEAT: It is therefore critical to review the definitions to determine the duration of disability benefits, the definition of disability, any limitations due to the nature of the disability. The benefits described in the benefits pamphlet should be given to the applicant, and the applicant's attorney should request a summary of the plan and copy of the plan. Generally speaking, employer-sponsored group Long-Term Disability benefits (LTD) are difference from privately purchased Long-Term Disability benefits in that private LTD plans may or may not have an offset for Social Security and workers' compensation benefits. Almost all employer-sponsored group Long-Term Disability plans (LTD) require an offset. The information provided herein is illustrative of a typical Long-Term Disability (LTD) plan, but many plans differ from the requirements of a specific LTD plan significantly.

Some plans are for a set number of years, e.g., five years. Other plans provide a fixed percentage of the wage earners' income (e.g., 60%) through age 65. Virtually all plans terminate at age 65, with the exception of individuals who become disabled after a certain age (e.g., 62), in which case some plans may provide for five years of disability benefits.

Long -Term Disability benefits are similar to Social Security in that they do not require that the individual be disabled due to a work-related injury. This is in contrast to workers' compensation benefits. Some plans adopt a definition similar to Social Security and, in fact, some union plans require that the individual be awarded their Social Security Disability benefits (e.g., construction unions before a union disability pension will be awarded). Some plans have a more liberal definition of disability, such as inability to engage in "own occupation" for first two years, and then any occupation for which the individual is reasonably able to perform for the duration of the time that disability benefits are payable. In addition, many plans have restrictions on receipt of benefits for drug and alcohol addition or psychological ailments, specifically limiting the receipt of such benefits for a maximum of 24 months.

Some plans have provisions for awarding partial disability benefits after a defined period of total disability. In addition, LTD carriers potentially are a fruitful source of vocational rehabilitation funds in appropriate cases.

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II. ADMINISTRATION OF PROGRAMS

The litigation/administrative path for the three types of benefits are quite different:

A. Social Security is administered by an independent federal agency. Application for disability benefits are typically handled as administrative proceedings, with an initial denial, request for reconsideration, after denial at the reconsideration level, a request for hearing before a federal administrative law judge. If the action is denied by an administrative law judge (ALJ) the individual has the right to appeal to the Appeals Council in Arlington, Virginia, and, ultimately, to file an action against the S.S.A. in the federal district court. The pertinent regulations are contained in 20 Code of Federal Regulations 404, et. seq.

B. Workers' compensation actions are handled through the Workers' Compensation Appeals Board. This is state administered and the requirements for workers' compensation; the forum for litigation of such actions is regulated by the State of California, and workers' compensation programs vary from state to state.

C. In contract, since Long-Term Disability benefits are voluntary by the employer, and therefore not state-mandated, the types of benefits offered vary. This is the case whether they are employer provided, whether through a self-insured plan, or through an insurance carrier. If a dispute arises under an employer-sponsored Long Term Disability plan, they are typically covered under the jurisdiction of ERISA litigation (Employee Retirement Income Security Act of 1974 29U.S.C. Section 1001, et. seq.).

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III. HOW EACH PROGRAM TREATS RECEIPT OF BENEFITS FROMOTHER PROGRAMS

A. Social Security Disability benefits - The Social Security Administration does not deduct for LTD benefits under Title II Disability or Title II Retirement benefits. They are considered private insurance benefits and do not effect non-SSI Social Security benefits.

With regards to the effect of workers' compensation benefits on Title II Social Security Disability benefits, the general rule is that for disability benefits (not for age 62 or 65 retirement benefits) the applicant may not receive in combination of the workers' compensation benefits and Social Security Disability benefits more than 80% of his average current earnings in the highest of the last five years before he became disabled. Furthermore, Social Security, while it considers the actual amount of temporary or permanent disability benefits if they are paid out weekly, allows the consideration of formulas for apportionment of lump sum settlements. Such settlements may be apportioned over the individuals lifetime (CAVEAT: A recent 9^th Circuit case which originated in Oregon, Hodge v. Shalala, 27 F.3d 430, (9^th Cir. 1994) apportioned a workers' compensation settlement not over the applicant's lifetime but under Oregon workers' compensation law, over the individual's working lifetime, to age 65. Furthermore, while SSA does not offset Social Security Disability benefits for amounts set aside for future medical, such set asides may drastically alter the individual's eligibility for Medicare, and Medicare may require proof that the entire amount was spent for the covered medical condition before it will pay for said treatment.

B. Workers' compensation - typically does not offset for benefits received from Social Security or Long-Term Disability. However, the characterization of settlement proceeds in a workers' compensation Compromise and Release, whether benefits are for future medicals or temporary or permanent disability benefits, may effect how other programs reduce their benefits.

C. Long-Term Disability - because LTD benefits are contractual in nature, the exact contractual provisions vary from insurance carrier and employer. It is critical to review the exact provisions of the policy which are typically contained in both a summary and the actual LTD plan. They can often be obtained from the employer's program administrator. Most plans are "income protection plans" and safeguard a set percentage (e.g., 60-70% of the injured worker's salary) for a set period of time that the worker cannot perform his prior work or, depending on the definition of disability, any form of substantial gainful activity. It is possible to limit the effect of the workers' compensation settlement on the LTD benefits by insuring that before any negotiations are completed between the applicant's attorney and the workers' compensation insurance carrier and their representative, that the written approval of the LTD carrier is obtained to any portion of the agreement that effects their right to recovery. It is also important in reviewing the LTD plan to determine what benefits they consider as an offset, e.g., some plans may consider temporary and permanent disability as an offset, but not future medical payments.

CAVEAT: Future medical payments may adversely affect the individual's ability to obtain Medicare coverage for the covered condition, and that may be the only medical benefits available to the individual.

Virtually all disability plans provided by the employer, even with some employee contribution, have an offset for receipt of Social Security Disability benefits. Many plans have a requirement that the individual apply for Social Security Disability benefits, and if the person is found eligible for such benefits, the plan will offset the amount initially received by the individual for their S.S.A. benefits less any attorney fees, as well as their future monthly checks. The applicant would still receive the cost of living increases awarded on a yearly basis by the Social Security Administration.

An individual cannot negotiate to receive a lump sum in lieu of his or her Social Security benefits with the federal government. It is generally beneficial to both the applicant and the LTD carrier that an individual apply for and receive Social Security benefits, since most plans offered by reputable insurance carries will allow the individual to keep their cost of living increases after the initial monthly amount of benefits are awarded.

CAVEAT: Sometimes, a plan will attempt to also recoup any future cost of living increases that the individual receives after he is first placed on Social Security Disability. Most reputable carriers will not attempt to do so and, in fact, it is a "selling feature" to encourage the individual to apply for Social Security Disability that the individual and his family will get to keep any future cost of living increases. In point of fact, California Insurance Code sections 10127.1and 10127.15 states that "Any provision contained in a policy of disability insurance, or a self-insured employee welfare benefit plan, for a reduction of loss of time benefits during a benefit period because of an increase in benefits payable under the federal Social Security Act, as amended, shall be null and void with respect to any such increase which occurs on or after the effective date of this section." (Added by stats. 977, effective July 8, 1977).

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IV. SUGGESTIONS FOR MAXIMIZING RECOVERY TO THE WORKER, ANDMINIMIZING COSTS TO THE EMPLOYER

A. Social Security - S.S.I. is a different program (in effect, a federal welfare program for the aged and disabled), any income received is considered a dollar-for-dollar for reduction for benefits in the month it was received and a resource thereafter. An individual with greater than$2,000.00 in resources ($3,000 for a couple) is ineligible for any benefits.

Social Security retirement age 65 (Title II) benefits do not offset for SSA, neither does age 62 early retirement benefits, but age 62 early retirement benefits do not come with Medicare.

Social Security Disability benefits (Title II) - there is no offset for LTD benefits. There is an offset for workers' compensation permanent or temporary disability benefits. If the case is settled with regards to such benefits, such as with a C & R, it may be beneficial in appropriate circumstances to place appropriate language in the Compromise and Release apportioning the recovery over the applicant's lifetime (commonly referred to as the "Hartman formula," and approved in the S.S.A. P.O.M.S.(Program Operation Manual - SSA's internal regulations) at 52001 et. seq. This is typically most helpful where it will reduce the amount of permanent disability benefits from the maximum rate to a lower number, and the applicant would otherwise have had a significant offset because he was a low wage earner. On rarer occasions, the use of other formulas suggested in the P.O.M.S. might be more appropriate, for example for an individual who is closely approaching 65, and has substantial medical and legal expenses, may deduct those first, and the balance of the C & R will be considered as if it was awarded the claimant after age 65 and is therefore excluded.

B. Workers' Compensation: Does not offset for SSA or LTD.

C. Long-Term Disability: Generally offsets for SSA and WC benefits, look to the plan. Since there is an offset for SSA benefits, advise a client receiving such LTD benefits to never take early SSA retirements (age 62 benefits).

Ascertain what applicant's LTD plan is, who the insurance carrier is, and whether the employer is self-insured (even if administered through an insurance carrier). You should include prior to completing any negotiations that will affect the interest of the LTD carrier, the written approval of the carrier. Ascertain what benefits are and are not considered for reduction in LTD benefits. Make sure that the applicant is aware of his responsibility and the plan requirements. A client who is unaware of how such benefits will affect LTD, and is "surprised" by same when his benefits are reduced, is not a "happy client." The best approach is to be up-front with both the applicant, carrier, employer and LTD insurance company and resolve settlement issues before the Compromise and Release is completed rather than have problems arise thereafter.

Despite the fact that almost all LTD plans will offset for SSA, it is in the applicant's best interest to apply for and receive SSA, in almost all instances, as such Social Security will include future cost of living increases which can be significant over the individual's lifetime, and because once an individual receives SSA their earnings record is frozen, which will mean that they will not have a series of "dead" no earnings years prior to their retirement, which will drag down their age 65 retirement benefits. In addition, after two years and five months of eligibility, an individual is entitled to receive, when they obtain their SSA disability benefits, Medicare which for a nominal monthly sum provides coverage which is superior to many individual's COBRA conversion insurance benefits, and is also less costly.

The only instance where the application for SSA benefits may wish to be deferred is where an employer grants indefinite health insurance benefits to the individual and his family, and the award of Medicare will terminate the benefits to the individual and their family. Such provisions are rare.

In conclusion, by reviewing the differing types of benefits an individual is eligible, it is possible to better understand the complex inter-relationship between workers' compensation, Social Security and Long-Term Disability. Advance planning can often be an effective means in maximizing recovery, and insuring that the injured worker is aware of what benefits are available to him, minimizing confusion as to offset provisions, and insuring that any such issues are resolved.

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Certain benefit payments are not included in the workers' compensation offset:

(1) Payments made under the Federal Employers Liability Act (Railroad Workers);

(2) Sickness benefits paid under the Railroad Unemployment Insurance Act;

(3) Unemployment Compensation;

(4) Company sick or disability plan benefits;

(5) State payments for non-work-related disability;

(6) Part B Black Lung benefits;

(7) Jones Act benefits;

(8) VA and Welfare benefits;

(9) Private pension or insurance benefits; and

(10) Public disability benefits (except Workers' Compensation) payable to a public employee based on employment covered under Social Security.

It should be noted SSA cannot offset where the employer receives the workers' compensation payments while providing the injured worker his salary under a formal or informal salary continuation plan. Offset only applies when the worker has actual use of the Workers' Compensation payments.

See Social Security Program Operations Manual System ("POMS") DI 52001.070, DI 52001.075, DI 52001.535. Appeals Council Decision, SS Ruling 70-57a (Nov. 1970). 20 C.F.R. Section 404.408(b)(2)(ii).

Certain other benefits, including VRTD paid in addition to, but not in lieu of periodic benefits, are totally excluded from the lump sum subject to offset as are funds for home health aids (in the form of skilled nursing care), penalties, payments to dependants, and attorney's fees (20 C.F.R. 404.408(d)).

Section 404.408(d) of 20 C.F.R. states: "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 the claim for public disability payments" or workers' compensation . . . are excluded in computing the workers' compensation offset.

The excludable expenses must be properly documented to the satisfaction of Social Security (20 C.F.R. 404.408(d); POMS DI 52001.535). They must reflect "either the actual amount of expenses already incurred or a reasonable estimate, given the circumstances in the individual's case of future expenses . . .".

These excludable expenses may be shown by the Compromise, Court Order, or "other evidence as the Social Security Administration may require" such as:

(1) A detailed statement by the individual's attorney, physician, or employer's insurance carrier; or

(2) Bills, receipts, or canceled checks; or

(3) Other clear or convincing evidence from which the amount of expenses may be determined.

The workers' compensation community has long been aware that medical expenses paid by an injured worker in connection with his workers' compensation case are excludable, including a portion of a settlement or award specified as for future medical expenses. However, this must be based on a reasonable estimate, considering the specific circumstances of the case. These estimated medical expenses must be established by the evidence, or will not be excluded. (20 C.F.R. 404.408(d)). Thus, in Smith vs. Weinberger, 381 F.Supp. 1307 (E.D.Mich.1974) the Court refused to exclude future medical expenses because the agreement did not clearly designate an amount for future medical expenses and did not identify actual projected future medical expenses. See too, Hatch vs. Heckler, 626 F.Supp. 1367 (N.D. Calif 1986). But practitioners must use other cautions, however, in establishing allocations for medical care, as there is a potential conflict with medicare coverage (see below).

Workers' compensation payments to a widow for death benefits are entirely excludable from any Social Security offset, as they are not made to the "individual" worker under 42 USC 424a. Similarly, any penalties assessed against the carrier, inuring to the employee's benefits, are excluded from the offset, since these are not based on the nature and extent of the employee's disability. (See POMS DI 52001.075)

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In many cases, individuals receive some or all benefits in the form of a single lump sum. When lump sum benefits are received, the lump sum amount is regarded by the Social Security Administration as a substitute for periodic payments. The Administration will regard the lump sum amount as representing some form of periodic payment, and, for purposes of calculating any offset, will treat the lump sum as an amount which otherwise would have been paid periodically. Current law allows the Social Security Administration to substitute a reasonable periodic payment rate for the lump sum.

What periodic rate should be substituted? In most cases, the longer the period over which the lump sum (after excludable expenses) can be "spread," the better for the worker, because a longer spread means a lower monthly benefit rate is factored into the offset calculations, with less resulting likelihood of an offset.

42 USC 424a(a) merely requires that a "reasonable method of calculation" be used to determine whether a lump sum settlement triggers an offset. Pursuant to Social Security Ruling 87-21c, which has the force of law, the Administration will select one of the following rates, in the following order of priority:

(1) the rate specified in the award. The Administration must first apply any rate which has been specified in the award. If the award specifies a rate based upon life expectancy, that rate will be used ⁽¹⁾.

(2) the periodic rate paid prior to the award (e.g. the TTD rate or, if applicable, the PD rate, whichever was last paid), if no rate has been specified in the award, or

(3) the State's workers' compensation maximum rate in effect at the time of injury, if no rate was specified in the award, and if no periodic payments were made. Forty two States have established a periodic maximum rate of sixty-six and two thirds percent of the worker's pre-disability income.

If the TTD rate (usually much higher than the PD rate), or even the PD rate is used, there is a much greater likelihood of triggering an offset. Almost always, it is in the worker's best interest to spread the lump sum over the remaining years of expected life, based upon use of life expectancy tables. (Each case, naturally, should be determined on its own merits.) This method of determining a periodic rate most often results in minimal reduction of Social Security disability benefits and provides a maximum amount of protection for the low wage earner.

To see why, let us look at the example of a 47 year old male wage earner who was earning $2,000 per month (his ACE) until he was injured in an industrial accident. His injuries are sufficient to prevent him from working, and he is entitled to receive $1,350 per month from Social Security (which includes $450 per month paid to his wife and two children ⁽²⁾). The injury resulted in a long period of treatment and rehabilitation, during which he was paid $310 per week (or $1334 per month) in temporary disability benefits from his employer's workers' compensation insurance carrier (representing sixty-six and two thirds percent of his pre-disability income). Ultimately he reached a settlement with the insurance carrier whereby he will receive, through a compromise and release, a lump sum payment of $45,000.

His temporary workers' compensation benefits, when added to his Social Security entitlement, creates a total $2,684. This amount exceeds the 80% threshold of his pre-disability income ($1,600) by $1,084, entitling the Social Security Administration to make a $1,084 reduction in his Social Security disability benefits, paying him only $266 per month.

When the compromise and release ("C&R") is negotiated, the temporary benefits have stopped, and the worker's full Social Security entitlement of $1,350 per month would normally be paid from that point on. But now our worker has negotiated a $45,000 lump sum settlement. Since the lump sum is regarded as a substitute for periodic benefits, the question becomes: what periodic rate to use as a substitute for the lump sum amount when determining if there will be an offset imposed? If the State's maximum rate is used (sixty-six and two thirds percent), Social Security will continue to impose an offset of $1,084 each month for approximately three and one half years, when the total amount offset will have reached $45,000.

However, the worker's attorney looks at life expectancy tables and discovers that his 47 year old male client has a 30 year life expectancy. He spreads the $45,000 over the 30 years of remaining life, resulting in a periodic rate of $125 per month. In the C&R document, the lump sum settlement is defined as a permanent disability payment, and apportions it over his remaining life, representing periodic payments at the rate of $125 per month for the remaining 360 months (or 30 years) of his expected life.

If this rate is used, there will be no offset whatsoever. The worker's monthly Social Security entitlement ($1,350) and his recalculated workers' compensation benefit ($125 per month) total only $1,475. This is less than 80% of his monthly pre-disability income. This results in no offset whatever.

WHEN SPREADING A LUMP SUM OVER THE APPLICANT'S LIFETIME IS OF NO HELP IN REDUCING OFFSET, APPLY THE EXCLUDABLE EXPENSES CLEVERLY

Even where a lump sum settlement is spread over the expected life of the injured worker, an offset is still possible if the worker is elderly, or if the lump sum is exceptionally large. In these unique situations, and others, there are alternatives which can reduce or eliminate the possibility of an offset.

Once a permanent disability rate is determined, and once excludable expenses have also been determined, the workers' compensation practitioner can, in some cases, reduce the likelihood of an offset by careful consideration of how the excludable expenses will be applied to the lump sum spread.

Current law requires the Social Security Administration to use one of three methods, depending on which one is most advantageous to the claimant ⁽³⁾, referred to as "Method A," "Method B" and "Method C".

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METHOD A

By this method, much like some tax deductions, excludable expenses are excluded "up front" at the beginning of the proration period, and before the remainder of the lump sum is prorated. By doing this, a Social Security beneficiary can actually avoid offset completely, at least until Social Security disability benefits paid out to the claimant become equal to the excludable amounts.

This "front loading" of excludable expenses is intended to help disabled persons who are approaching retirement age, and who would be converting to retirement benefits after only a short time of receiving disability benefits ⁽⁴⁾. It allows them to receive disability benefits for a short time with no offset whatever, and then to avoid the effects of an otherwise problematic offset later. Consider using this method not only in the case of those nearing retirement age, but also in the case of some children, and other auxiliary beneficiaries, who will qualify for auxiliary benefits only until their 18th birthday, and who are approaching that age. This method of application also helps persons who receive a closed period of disability (that is, a period of disability which has lasted at least one year, but which has already ended) from Social Security.

To illustrate how this works, let us assume an individual who is 59 years and 6 months old. Life expectancy tables tell us that he has 15 years and 6 months of life expectancy (or 186 months). His ACE is $2,000 per month, 80% of which is $1,600. He is receiving $1,200 per month from Social Security disability insurance benefits.

Due to a terrible injury at work, our example gentleman achieves a 100% disability rating, which yields a PD rating of $336 per week. He settles a workers' compensation case by Compromise and Release, the terms of which provide for a lump sum payment of $744,000 to the applicant, and $100,000 payable to the attorney for attorney fees.

If no periodic rate is inserted into the Compromise and Release, Social Security will use the PD rate of $336 per week as a substitute "periodic rate" for offset purposes. When the $336 per week (or $1456 per month) is added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $1,056. This will generate an offset of $1,056 per month, reducing the worker's Social Security entitlement to $144 per month.

Spreading the $744,000 lump sum over the 186 months of remaining life expectancy provides no relief from offset. To do so yields a periodic rate of $4,000 per month. When the $4,000 is added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $3,600, generating a complete offset of his Social Security disability benefits, reducing them to zero. Can anything be done to protect his benefits?

Yes, by "front loading" the excludable expenses (in this case the $100,000 attorney fee) when applying them to the lump sum award. The $100,000 fee represents approximately 5 years and 8 months of benefits at the rate of $336 per week (the PD rate) ⁽⁵⁾. Since the attorney fee is an excludable expense, the Social Security Administration will forbear imposing the offset for 5 years and 8 months, by which time the worker will have reached age 65. Since his Social Security entitlement is not subject to offset after age 65, applying the PD rate of $336 per week against the excludable expenses first, and the remaining 744,000 later, completely avoids the offset.

METHOD B

A second possible method of applying excludable expenses to the lump sum award treats the excludable expenses as a percentage of the total award, and requires the Social Security Administration to reduce the periodic rate which would otherwise apply by a corresponding percentage.

As an example, let us consider an individual who is 45 years and 6 months old. Life expectancy tables tell us that he has 29 years and 6 months of life expectancy (or 354 months). His ACE is $2,000 per month, 80% of which is $1,600. He is receiving $1,200 per month from Social Security disability insurance benefits.

Due to a work injury, our example gentleman achieves a 50% disability rating, which yields a PD rating of $140 per week. He settles a workers' compensation case by Compromise and Release, the terms of which provide for a lump sum payment of $380,000, of which $250,000 will be paid to the applicant, and $130,000 payable for medical expenses and attorney fees.

If no periodic rate is inserted into the Compromise and Release, Social Security will use the PD rate of $140 per week as a substitute "periodic rate" for offset purposes. When the $140 per week (or $606.66 per month) is added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $206.66. This will generate an offset of $206.66 per month, reducing the worker's Social Security entitlement to $993.34 per month.

Spreading the $250,000 lump sum over the 354 months of remaining life expectancy provides no relief from offset. To do so yields a periodic rate of $706.21 per month. When added to his current Social Security entitlement of $1,200 per month, the total will exceed his allowable limit of $1,600 (80% of his ACE) by $306.21, generating an even greater offset of his Social Security disability benefits, reducing them to $893.79.

Using "Method A" and front-loading the excludable expenses will prevent offset for a period of 17 years and 10 months, by which time he will not yet have reached age 65. At that point, the offset will begin, and continue for nearly two more years.

"Method B" will protect this worker from offset completely. The $130,000 in medical and legal fees are excludable expenses, and represent 34% of the total award of $380,000. When the PD rate of $140 week is reduced by a corresponding 34%, the resulting weekly rate is $92.11 per week, or $399.14 per month ⁽⁶⁾. When this monthly result is added to the worker's current Social Security disability entitlement of $1,200 per month, the total is less than 80% of his ACE, ergo no offset.

METHOD C

This third method of applying the excludable amounts to the lump sum will be advantageous in a situation where the worker began receiving Social Security Disability benefits a long while after his/her workers' compensation periodic benefits ceased.

Using Method C, the lump sum is first reduced by the amount of excludable expenses. The periodic rate is then applied to the lump sum beginning on the date when the periodic benefits ceased, and continuing until the amount of the lump sum is exhausted. Use of "Method C" often results in no (or less) offset because the is exhausted before (or shortly after) the entitlement to Social Security disability benefits begins.

As an example, assume an individual who was injured at work on January 1, 1988. He received TTD benefits until November 30, 1990, at which time he became permanent and stationary with residual, permanent levels of impairment. Due to a substantial dispute concerning the extent of permanent disability, no periodic benefits or PD advances were paid after November 30, 1990.

In January, 1999, he applied, and was awarded, Social Security disability benefits retroactive to January 1, 1998 (one year before the date of his application, which is the maximum allowable retroactive benefit). Since that time, he has received $800 per month from Social Security. He is a low wage earner, with an ACE of $1,500.

On July 1, 1999, he settled the case through Compromise and Release, providing for a lump sum settlement of $100,000, of which $15,000 represents attorney fees and medical expenses. He was considered 100% disabled, yielding a permanent disability rate of $1000 per month (66 and 2/3 percent of his pre-injury monthly earnings). He is 58 years of age, with a life expectancy of exactly 14 years (168 months).

If his attorney does nothing, Social Security will add $1000 to his Social Security benefit of $800, for a total of $1,800. The Administration will then compare this number with his ACE (after applying a 20% reduction), or $1200, yielding an offset of $600, and reducing his Social Security payments to $200 per month.

Using life expectancy tables to spread the $85,000 lump sum over the remaining 168 months of his expected life does not help much. This yields a periodic rate of $506 per month, which still results in an offset of $106, reducing his Social Security benefits to $694.

Using "Method A" to front-load the $15,000 excludable expenses causes the Administration to forbear offset for less than 2 years, after which an offset of $567 per month will remain in effect for 5 years until he reaches age 65.

Using "Method B" to reduce the periodic rate ($1,000 per month) by the percentage of settlement represented by the excludable expenses (15%) also results in an offset of $450, and reduces his Social Security entitlement to $350 per month.

Use of "Method C" results in no offset, because "Method C" presumes the periodic rate will be applied to the lump sum starting on some date before the applicant became eligible for the lump sum. The Social Security Administration determines the start date of the application of the offset in the following order of priority:

1. the lump sum will be allocated to the period specified in the award, or

2. If no date is specified, and periodic payments were made, the lump sum will be prorated beginning the day after the periodic payments ended, or

3. If the lump sum award does not specify a beginning date, and the worker did not receive periodic payments, the lump sum is allocated to:

- the date of injury for workers' compensation, or

- the date of employment termination for occupational disease, or

- the date the illness began for permanent disability benefits ⁽⁷⁾.

In our hypothetical example, the worker received periodic benefits until November 30, 1990. Using December 1, 1990, as a starting date for the application of a $1000 monthly periodic rate against a lump sum (reduced by the excludable expenses) of $85,000 results in the offset being exhausted after 85 months (7 years and one month), or by December 31, 1997. This will result in no impact whatever on his Social Security disability benefits because he did not begin to receive them until January, 1988.

When a workers' compensation settlement looks as if it will impact a client's entitlement to Social Security disability benefits - even after the lump sum award is spread over the remaining expected life of the applicant - there still may be workable solutions to the problem.

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ANNUITIES:

The Social Security Administration ("SSA") issued Social Security Ruling 81-32 to discuss the applicability of the offset provisions of section 224 of the Act to annuities awarded in a workers' compensation settlement.

Generally speaking an annuity is considered as workers' compensation benefits when it is an integral part of an award.

According to this ruling, "[i]t is the position of the Social Security Administration (SSA) that where the W/C 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." (SSR 81-32).

Thus, the critical test in determining how SSA will view the settlement depends on whether the worker had the "option" to convert the annuity into a lump sum.

SSR 81-32 sets forth the following example:

"A worker's WC award consisted of a lump sum of $10,000, and an annuity to be purchased by the employer and insurer to provide the worker a lifetime income of $500 per month for the first year with an increase in the monthly amount after that under a five percent compound interest escalator schedule. ... The insurer advised that the lump-sum settlement and the annuity are completely separate; the worker did not have the option to receive the lump-sum settlement only; the worker did not determine the amount of the monthly payment from the annuity; and the monthly payment from the annuity was payable immediately. Although the annuity was part of the WC settlement award agreed to by the worker, he did not have the option of converting the purchase price of the annuity into a lump sum." (SSR 81-32).

In this example, because the worker did not have the option of taking a lump sum in lieu of the annuity, he or she did not have the "dominion and control over the time and manner of the annuity payments." When SSA determines whether the receipt of the annuity payments will cause an offset on the Security Disability benefits, the offset computation must be done at the time the annuity payments are actually paid to the worker.

Consequently, when settling a case by a structured settlement which involves an annuity, the attorney must consider the effects of the agreement on the worker's Social Security disability benefits. It is important to remember that whether the worker had the option to elect an annuity or it was a mandatory term of the agreement required by the defendant and insurance carrier is what governs when SSA determines the applicability of the offset provisions set forth section 224 of the Act.

If the worker did not have the option to elect an annuity and it was a mandatory term of the agreement, then SSA will use the monthly payment amount received at the time it is paid for the purposes of offset calculations. On the other hand, if the worker was given an option which he or she elected, then SSA is instructed to consider the amount paid up-front which will enable the application of the life time proration method for offset calculations if these instructions are set forth in the compromise and release. This method may be preferable if it will minimize an offset or remove the offset altogether. The attorney should, therefore, carefully examine the circumstances of each case and always take into consideration the worker's average current earnings ("ACE," or 80% of his/her pre-disability income) and monthly Social Security Disability benefit amount. ⁽⁸⁾

IRREVOCABLE TRUSTS:

SSA published Social Security Ruling 81-20 which discusses the issue: how SSA should consider the effect of irrevocable trust agreements under a compromise and release settlement when computing offsets under the provisions of section 224 of the Act.

SSR 81-20 gives the following example:

"On April 6, 1971, a Workmen's Compensation Appeals Board approved a 'Compromise and Release' of the claim filed by [worker] against his employer. The amount of the settlement, $23,548.58, was paid 'in lieu of' periodic payments. Pursuant to this approval, the Board awarded [worker] $1,000, paid certain medical-legal costs and attorneys' fees, and provided that the remainder of the award ($19,178.21) would be payable to a bank as trustee under the terms of an irrevocable trust entered into by [worker] and the bank. The trust was to terminate on January 1, 1980, unless terminated earlier by [worker's] death. This trust was created pursuant to an order of the Workmen's Compensation Appeals Board. Thus, the workmen's compensation benefits are not being paid directly to [worker] but are deposited under the terms of the trust agreement which provides that no income from the trust will be allocated to the claimant until July 1, 1972, and $50.00 a month will, commencing December 1, 1971, be allocated to [worker] from the principal."

In order to determine the effects, if any, of the periodic payments on the worker's Social Security Disability benefits, the worker's compensation award and the terms of the trust must be examined.

SSA must determine whether the $19,178.21 paid into the trust should be prorated beginning December 1, 1971 at $50.00 per month as stated by the terms of the trust or should be prorated as a lump sum on the basis of the number of weeks the lump sum is referable or on the basis of the weekly compensation rate. The method to be utilized depends on whether the worker had an option to elect the lump sum without restriction or of establishing the trust. To make this determination, SSA will look at the compromise and release agreement and the pertinent provisions of the State Workmen's Compensation law. ⁽⁹⁾

If the worker had the option to establish the trust, then SSA will view the entire lump sum and prorate it without "regard to the terms of the trust agreement in making the required reduction under section 224 of the Act." (SSR-81-20).

On the other hand, if the establishment of the trust were mandatory, then SSA will determine the applicability of an offset on the worker's Social Security Disability benefits by considering only those sums actually received. In the example cited above, the $1000 paid directly to the worker and the $19,178.21 paid into the trust were workers' compensation benefits payable in a lump sum as a commutation of, or a substitute for periodic payments. The worker received $1000 on May 1, 1971 and $50.00 monthly payments beginning December 1, 1971. If no part of the sums received are for excludable expenses, then SSA will only look at the sums received to determine the applicability of an offset. Any amounts referable to the original lump sum at the termination of the trust will be considered separately at that time for the purposes of offset calculations a required by section 224 of the Act. (SSR 81-20).

Consequently for the attorney settling a workers' compensation claim through a structured settlement with the establishment of an irrevocable trust, it is important to distinguish whether the establishment of the trust was mandatory or optional. The worker's ACE and monthly Social Security Disability benefits must always be considered. Depending on the worker's option or lack thereof, SSA will apply different methods in determining the applicability of an offset on the worker's Social Security Disability benefits.

Sometimes a client has an application for Social Security disability benefits pending, but not yet approved, when the opportune time to settle the workers' compensation case presents itself. In such cases, any negative impact of a workers' compensation settlement upon the worker's entitlement to Social Security disability benefits will not surface until the disabled worker resolves his/her Social Security disability claim. Only then does the Social Security Administration undertake to assess the impact of the receipt of workers' compensation benefits on the worker's Social Security disability entitlement.

It is imperative, however, to consider the need to minimize the impact on Social Security disability benefits at the time the Compromise and Release documents are drafted.

On October 3, 1997 the Social Security Administration issued a new Social Security Ruling, known as "Social Security Ruling 97-3p." Ruling 97-3p, which has the effect of law, provides that the Social Security Administration is not bound by "after the fact" amendments to Workers' Compensation settlements whose purpose is, in significant part, to try to avoid the impact of a lump sum settlement on Social Security Disability benefits. Ruling 97-3p provides that if the amended terms are made solely to circumvent the Workers' Compensation offset provision, then the Social Security Administration may disregard it.

The Administration will most commonly invoke ruling 97-3p where an "after the fact" amendment to the settlement is created at some time after the settlement has been finalized. Where the amending language is filed as part of the original settlement documents, the Administration, at least at the present time, will not invoke the provisions of ruling 97-3p.

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MEDICARE CONSIDERATIONS

Prior to 1984, the astute workers' compensation attorney would protect his client's Social Security benefits by providing in the Compromise and Release that the bulk of the settlement proceeds were for future medical expenses. Under the Social Security Regulations and 42 USC 424(a) this characterization would be accepted if it is reasonable in light of the facts of the case. However, in 1984, the Medicare Act (42 USC 1395 y (b)(1) and regulations were changed (42 C.F.R. 411.20) clearly allowing the federal government to recover any Medicare benefits paid where a third party is responsible for payment of medical benefits.

Thus, any provision in the Compromise and Release for future medical benefits subject the worker to the same type of offset as with Social Security Disability benefits. The total amount of funds explicitly designated as and for future medical benefits must be spent for medical treatment before Medicare is required to provide medical insurance coverage. This could be disastrous for an individual who will require future medical treatment and has no other medical insurance, as his workers' compensation settlement must be totally dissipated before he can receive Medicare benefits. (42 C.F.R. 411.43(b), 42 C.F.R. 405.320). Thus, the formerly correct method of protecting the workers' compensation settlement from offset is no longer correct.

If a settlement appears to be an attempt to shift to Medicare the obligation for industrially related medical expenses, the settlement will not be recognized. (42 C.F.R. 411.46). Furthermore, this area is fraught with danger, as Medicare can reject the settlement agreement and make its own computation. However, medical expenses incurred by an injured employee after settlement may be covered by Medicare under the following conditions:

(1) Where liability for payment of future medical expenses is seriously in dispute;

(2) the Compromise and Release forecloses the possibility of any future payment of workers' compensation benefits;

(3) the claim is being resolved by Compromise and Release for substantially less than would be paid had liability not been in issue;

(4) there are no facts to indicate that the settlement attempted to shift the burden of future medical expenses for the industrial injury to Medicare.

However, even in these circumstances, Medicare may disregard the agreement. It is suggested that Compromise and Release documents regarding future medical care be drafted very carefully if Medicare is a necessary resource, spelling out the disputed liability in detail. In addition, one should warn the applicant that there is no guaranteed protection of Medicare benefits.

CONCLUSION

While representing a person in regard to workers' compensation claims, it is essential to consider the possibility of that person also claiming Social Security Disability benefits and, if so, the impact on the Social Security Disability benefits caused by the receipt of the workers' compensation benefits. Social Security Disability benefits are reduced based upon receipt of compensation benefits under State or Federal programs. The impact of the diminution in the receipt of Social Security Disability benefits based upon receipt of disability benefits from a State or Federal program is of greatest impact in the minimal wage earner cases.

Following this article are the following forms: an Informed Consent explaining Medicare and Social Security disability considerations (to be signed by the Applicant), an Offset Worksheet to aid the Applicant's attorney in determining the effects of the compromise and release on Social Security disability benefits, as well sample forms Addendum - Characterization of Settlement Proceeds and an Order Approving Compromise and Release and Findings of Facts.

Susan R. Wasserman, received her B.A. from U.C.L.A. in 1973 and her J.D. from Southwestern University School of Law in 1976. She is admitted to practice law in both California and New York. She was formerly an attorney advisor with the Social Security Administration and a former Deputy Public Defender in Contra Costa County. She was the chairperson of the Los Angeles County Bar Association, Social Security Section and has moderated panels on Social Security law including C.E.B. courses and N.O.S.S.C.R. and C.A.A.A. conference presentations. She is the proud mother of two adopted daughters from China ages 7 and 5. The Law Offices of Susan R. Wasserman represents disabled claimants throughout Southern California in Social Security disability matters exclusively.

Gordon L. Sroufe

Gordon L. Sroufe has had a long and distinguished career. He received his B.A. from Ohio State University and his Juris Doctorate from Capital University Law School. He was admitted to the Ohio Bar in 1961. He was the Chief City Prosecutor in Columbus Ohio. He was then appointed as an Administrative Law Judge with the Social Security Administration Office of Hearings and Appeals in 1974, and retired as An Administrative Law Judge with the Pasadena Office of the Social Security Administration Office of Hearings and Appeals in 1990. Since that time, he has been associated on both a part- and full-time basis with the Law Offices of Susan R. Wasserman.

James P. Shea,

Received his B.A. and M.A. from Loyola University in Los Angeles. He received a Ph.D. in English Literature from Marquette University in Milwaukee, Wisconsin, and a Juris Doctorate from Loyola University School of Law in Los Angeles. He is licensed to practice law in both California and Washington. He formerly taught English and Business Law at both the undergraduate and graduate level. He joined the Law Offices of Susan R. Wasserman as an associate attorney in 1993. He was formerly the Chairperson of the Los Angeles County Bar Association's Social Security Section.

Jennifer L. Cho,

Received a B.A. from U.C.L.A. in 1989. She received her Juris Doctorate from the University of West Los Angeles School of Law in 1994. She worked as a paralegal in the Law Offices of Susan R. Wasserman throughout her undergraduate and law school studies, and then joined the firm as an associate attorney upon being admitted to the California Bar in 1994.

1. See POMS DI 52001.555. See also Sciarotta v. Secretary of HHS, 837 F.2d 135 (3rd Cir.1988), upholding the so-called "Hartman" method.

2. Benefits paid to the worker on behalf of auxiliary beneficiaries are included in offset calculations. Subsequent cost-of-living increases are not. POMS DI 52001.001.

3. See POMS DI 52001.555

4. Social Security benefits are no longer subject to offset once the individual reaches age 65. 20 C.F.R. 404.408(a)(1)(iii).

5. $100,000 (attorney fees) / $336/week = 297.62 weeks

297.62 weeks / 52 weeks = 5.72 years (which is 5 years and 8.69 months)

6. $250,000 (amt. paid to applicant) / $380,000 (total award) = .6578947

.6578947 x $140/week = $92.11/week

$92.11 x 52 weeks / 12 months = $399.14 per month

7. See POMS DI 52001.555

8. SSA must verify whether or not worker had the option of being paid the lump sum as an annuity (POMS DI 52001.020) by looking at the compromise and release agreement itself or verifying the terms with the insurance carrier.

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APPLICABLE LAW

Title 42 Code of Federal Regulations §§411 et seq. define insurance coverage, the limits of Medicare payments, and the general provisions. It states, in part, that Section 1862 (b)(2)(A)(i) of the Act excludes Medicare payments for services to the extent that the payment has been made or can reasonably be expected to be made by workers' compensation. The regulations also contain provisions for recovery of conditional payments made by Medicare (42 CFR §411.24) and mandate that the beneficiary's cooperation is required (42 CFR §411.23(a). If the beneficiary fails to cooperate or if Medicare is unsuccessful in obtaining the funds because of beneficiary's lack of cooperation, Medicare may recover the funds from the beneficiary (42 CFR §411.23(b)).

The regulations also state that Medicare may waive recovery in whole or in part if the probability of recovery or the amount involved does not warrant pursuit of the claim (42 CFR §411.28(a)). 42 CFR §411.40 precludes Medicare payments for services covered under workers' compensation. Workers' compensation is defined as including state workers' compensation and provisions of Federal Employees' Compensation Act, as well as Longshoremen's and Harbor Workers' compensation Act. As defined within that section, Medicare will not pay for any service for which payment can reasonably be expected to be made promptly under workers' compensation. However, if the payment for the service may not be made under workers' compensation because the service is furnished by a source not authorized to provide that service under the particular workers' compensation program, Medicare pays for the service if it is a covered service.

The law provides that the beneficiary is responsible for taking whatever action is necessary to obtain any payment that can be reasonably expected to be made under workers' compensation (see, 42 CFR §411.43(a)). Furthermore, a CONDITIONAL Medicare payment can be made in a workers' compensation case if the beneficiary has filed the proper claim for workers' compensation benefits but the intermediary or carrier determines that the workers' compensation carrier will not pay promptly. This includes cases in which a workers' compensation carrier has denied a claim (see, 42 CFR §411.45(a)). In addition, Medicare will pay conditionally when the beneficiary, because of physical or mental incapacity, failed to file the proper claim with the workers' compensation carrier (see, 42 CFR §411.45(b)).

HOW MEDICARE VIEWS LUMP SUM PAYMENTS

The laws regarding lump sum payments are contained in 42 CFR §411.46. The law clearly states that if a lump sum compensation award stipulates that the amount paid is intended to compensate the individual for all future medical expenses required because of a work-related injury or disease, Medicare payments for such services are excluded until medical expenses related to the injury or disease equal the amount of the lump sum payment (see, 42 CFR §411.46(a)). Furthermore, the lump sum compromise settlement is deemed to be workers' compensation for Medicare purposes, even if the settlement agreement stipulates that there is no liability under the workers' compensation law or plan (see, 42 CFR §411.46(b)).

If the settlement appears to Medicare to be an attempt to shift the responsibility for payment of medical expenses for the treatment of a work-related condition to Medicare, the settlement will not be recognized. For example (cited in the regulations), if the parties attempt to maximize the amount of disability benefits paid under workers' compensation by releasing the workers' compensation carrier from liability for medical expenses for a particular condition, even though the facts show the condition is work-related, Medicare will not pay for treatment of that condition (see, 42 CFR §411.46 (b)(2)).

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THE EFFECT OF THE WORKERS' COMPENSATION SETTLEMENT FOR SERVICES FURNISHED AFTER THE DATE OF THE SETTLEMENT

The basic rule is that, in general, the settlement agreement allocates certain amounts for specific future medical services; Medicare does not pay for those services until medical expenses related to the injury or disease equal the amount of the lump sum settlement allocated to future medical expenses (see, 42 CFR §411.46(d)(2)). Without exception, if a lump sum compromise forecloses a possibility of future payment of workers' compensation benefits, medical expenses incurred after the date of the settlement, are payable under Medicare (see, 42 CFR §411.46 (d)(1)). The law has very specific regulations with regard to apportionment of lump sum compromise settlements of workers' compensation claims, citing specific examples of same. The law reflects that if a compromise settlement allocates a portion of the payment for medical expenses, and also gives reasonable recognition to the income replacement element, that apportionment may be accepted as a basis for determining Medicare payment (see, 42 CFR §411.47(a)(1)).

If, however, both elements are not given reasonable recognition or the workers' compensation award does not apportion a sum granted, the portion to be considered as payable for medical expenses is computed by a formula which is contained in 42 CFR §411.47(a)(2)(i)(ii). ⁽¹⁾ Federal law requires the determination of the ratio of the amount awarded, less reasonable and necessary costs incurred in procuring the settlement, to the total amount that would have been payable under workers' compensation had the claim not been compromised, multiplied by the total medical expenses incurred as a result of the injury or disease up to the date of the settlement. The product is the amount of the workers' compensation settlement to be considered as payment for medical expenses (Id.).

The regulations also cover specific requirements for determining the amount of Medicare overpayment where conditional Medicare payments have been made and the beneficiary receives a compromise settlement (see 42 CFR §411.47(b)). It is clear that federal legislation has also established that the parties involved may not settle a claim without satisfying Medicare's interests. Should a settlement occur without Medicare being reimbursed, the beneficiary or the beneficiary's estate or other parties can be held liable for the amounts proven to be due to Medicare. If a beneficiary is dissatisfied with Medicare's actions, the beneficiary may appeal.

Furthermore, Section 1862(b)(1) of the Social Security Act (42 USC §1395y(b)(2) provides that Medicare payments may not be made with respect to items or services to the extent that the payment is made or may be made under an automobile, medical, no-fault, liability insurance plan or workers' compensation plan.

Attachment "A" explains in detail to an applicant, the rights and potential effects that a workers' compensation recovery may have with regard to Medicare and Social Security disability benefits. ⁽²⁾ It should be noted that the potential for Medicare attempting to recover a conditional payment always exists with regard to an individual receiving Social Security disability payments. This is because the Social Security Administration may deem that the monies paid were "overpaid" and attempt recoupment of the overpayment, including, but not limited to potential action against the claimant's Social Security disability payments or other benefits payable by the Federal government.

However, in the Ninth Circuit case Quinlivan v. Sullivan (916 F.2d 524 (9th Cir. 1990)), the court considered the issue of Social Security disability overpayment and the appropriate standards to apply in a claimant's request for waiver of the overpayment. The Social Security Act provides waiver of overpayments if the claimant is without fault and the repayment of the overpayment would either defeat the purpose of Title II or would be against equity and good conscience (42 USC §404(b) 1988). The court concluded that waiver of the overpayment was appropriate as repayment would be "against equity and good conscience." (Quinlivan, 916 F.2d at 526). The regulations limited the interpretation of this phrase to three specific situations: namely, the claimant changed his or her position for the worse, relinquished a valuable right, or lived in a separate household from the overpaid person at the time of overpayment. Financial need is irrelevant to this determination (20 CFR §404.509(b)(1990). However, the court looked to Congress' legislative intent in drafting §404(b) utilizing the term "against equity and good conscience" to determine whether the regulation's interpretation was based on reasonable interpretation of the statute. The court found, that Congress' intent was to apply a "broad concept of fairness to apply to waiver requests, one that reflects the ordinary meaning of the statutory language and takes into account the facts and circumstances of each case." (Id. at 527).

Although the Quinlivan case dealt strictly with the issue of repayment of disability cash benefits and did not specifically address Medicare concerns, the court's interpretation of the statute is clear and should apply to requests for waiver of Medicare's claims for recovery. Furthermore, 42 CFR §1395gg(c) states that waiver is appropriate where recovery would be "against equity and good conscience."

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WHERE DOES AN ATTORNEY GO TO COMPROMISE A MEDICARE CLAIM FOR RECOVERY?

In the State of California, which is part of the Federal government, Region IX, contacts for Medicare claims and for workers' compensation repayment are handled by Part A and B government appointed intermediaries which are as follows: (These following information has been updated for 2002):

United Government Services
ATTN: Medicare Secondary Payer - Part A for Southern and Northern California

P.O. Box 9140

Oxnard, CA 93031-9140
Workers' Compensation Coordinator: Deborah Diaz (805) 367-1063

National Heritage Insurance Company

ATTN: Medicare Secondary Payer - Part B for Southern California

P.O. Box 515391

Los Angeles, CA 90051-6691

Workers' Compensation Analyst: Danny Alcabedos (213) 593-6068

National Heritage Insurance Company

ATTN: Medicare Secondary Payer - Part B for Northern California

P.O. Box 1307

Marysville, CA 95901

Supervisor: Kathy Riddle (530) 634-7427

The specific intermediary that deals with the Part A Medicare claim for workers' compensation matters in this state depends on the hospital in which the claimant was treated.

Current procedures within this district for the Medicare intermediary to obtain information regarding potential workers' compensation applicants, include copies of all applications for adjudication of claims occurring and entered into a computer bank, conditional billings from hospitals which indicate a workers' compensation carrier or potential job injury, notifications from beneficiaries, including questionnaires sent to the beneficiary, inter-contractor communications, and notifications from applicant's attorneys or from the carrier's attorneys.

As most workers' compensation cases are compromised and concluded through a compromise & release, some thought and strategy should be given as to how to compromise the Medicare claim for recovery.

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From the attorney's point of view in dealing with the Medicare intermediary, information which is helpful in reducing the amount of the Medicare claim for recovery can be medical reports documenting that the condition is only partially work-related, or that work-related and non-work-related conditions were both treated and what the proportion of medical billings for each are. Types of documentation that can be helpful in compromising and reducing the amount of the Medicare claim for recovery in that regard can also include medical reports, hospital reports, etc.

From a defense carrier's standpoint, information which could be helpful in compromising or reducing the amount of the Medicare claim for recovery includes the amount of exposure for that specific carrier, e.g. where an individual has worked 10 different places and each is only 10% liable.

It is not to the applicant's advantage to be over broad in stating which medical conditions the workers' compensation settlement includes. If a specific condition is not work related, do not include that medical condition in the settlement. This is to avoid the potential of the compromise and release settlement from adversely effecting the applicant's right to coverage through Medicare for non-work related medical conditions.

Regarding the language contained within a compromise & release, careful consideration must be given to two conflicting factors, one of which is the effect of lump sum settlements in workers' compensation cases on Social Security disability benefits. This is particularly relevant to the low wage earner, as Social Security may reduce the amount of Social Security benefits based upon the amount contained within a settlement for permanent or temporary disability benefits paid. However, as one can see, the practice of placing these benefits in a category for "future medical" is even more fraught with danger insofar as Medicare may conditionally pay or deny coverage for the work related condition until the sum set aside for future medical is actually used for the applicant's medical care. If no other provisions are made for future medical treatment the individual may be prevented from obtaining medical treatment. The attached informed consent of the beneficiary form may be used as part of a detailed explanation of Medicare ramifications (see attachment "A"). In addition, one possible safeguard, should a dispute arise with Medicare, is to provide the applicant with a report from the workers' compensation examining or treating physician which outlines future non-Medicare covered treatment needed should Medicare challenge the applicant's ability to receive Medicare. This may well demonstrate that the necessary medical coverage contemplated was for items needed and which are outside the purview of Medicare. Ultimately, in dealing with the Medicare intermediary or in the "non-adversarial" Social Security hearing, the information documented by the applicant's treating sources, at the time of the compromise and release, may be dispositive.

One potential strategy is to designate an appropriate amount of the funds designated for future medical expenses for specified non-Medicare covered services. See attachment "B" for items covered by Medicare Part A and Part B. However, what is covered and what is non-covered changes quickly. Further, the items designated must be medically relevant to the case at hand. Otherwise, Medicare may determine that this was an attempt to shift payment responsibility from workers' compensation to Medicare, inappropriately.

A second possible strategy leads one to suggest that in those cases in which there is no negative effect on the individual's Social Security disability benefit payments by allocation of sums to permanent or temporary disability, to place as much of the funds as possible in permanent and temporary disability benefits and rehabilitation benefits and indicate that future medical is in dispute (without designating a specific amount for future medical benefits). This may be advantageous particularly in smaller settlements where liability for future medical or the need for future medical is contested. As can be seen, this is an area with some controversy because of the broad scope of the regulations as they are currently written.

Several broad characterizations can be made with regard to this area. If a period of hospitalization for medical condition which was work-related is anticipated prior to compromise & release or a finding & award issuance, and Medicare has paid for a period of hospitalization, it is necessary to get either clearance or cover the Medicare claim for recovery and notify the Medicare intermediary so that this matter will not reappear to haunt the claimant after settlement of the case.

MEDICARE SET ASIDE TRUSTS

Recently there has been much controversy in the area of settlements and a suggestion that there is a requirement of establishing Medicare Set Aside Trusts. A review of the Ninth Circuit and District Court cases, however, does not raise the specter of Medicare being a troubling issue. In addition, an informal survey of experienced Social Security disability practitioners revealed to date that unlike workers' compensation offsets' significant impact on Social Security disability benefits where offset issues arise in an estimated 33.3% to 50% of the awards, disputes regarding Medicare issues have not been reported. Most importantly, it should be noted that while the Health Care Financing Administration has approved of Medicare Set Aside Trusts, the Medicare regulations and statutes do not provide or require the establishment of such trusts when settling workers' compensation claims.

The California workers' compensation payment schedule may include compensation for future medical in a case that settles by compromise and release. It should be noted in some settlements, little if any, financial compensation is provided for future medical care. Therefore, the issue of Medicare must be handled responsibly. It is the attorney's obligation to inform the applicant of the Medicare issues including the potentially remote possibility that Medicare may look beyond the scope of the settlement to determine the amount that should be allocated to future medical.

In certain rare instances, a Medicare Set Aside Trust could be a possible consideration. However, in general, it is more important for the applicant to have documentation of the reasonable, anticipated future medical expenses that may be incurred which includes non-covered Medicare items. This is especially true in light of the cost of establishing and administrating such trusts. A letter from the treating physician which sets forth the expenses arising from the injury and the treatment that may be required will be useful in the event there is a change in the Medicare practice or the medical coverage is challenged by Medicare and an appeal must be made to an Administrative Law Judge. For example, consider an individual suffering from "failed back syndrome" where the settlement outlines that surgical intervention is no longer appropriate but who will require pain medication (a non-Medicare covered expense) at the rate of $200.00 per month for the remainder of his or her life. The individual incurs medical expenses for which a claim is filed with Medicare. If Medicare denies coverage on the basis that it is a industrial medical expense, it is critical to have proper documentation of the necessity and reasonableness of non-Medicare covered future medical expense. Such documentation will be advantageous should the individual appeal and challenge the denial of coverage by Medicare. ⁽³⁾

MEDICARE HEARING PROCESS ⁽⁴⁾

Denial of coverage by Medicare may be appealed. The appeal process differs for Medicare Parts A and B. For Medicare Part A, the appeal is made to the intermediaries (usually private insurance companies contracted by the Health Care Financing Administration). Part B appeals are made to the carriers for review. If the denial of Part A coverage is affirmed by the intermediaries, appellants may request a hearing before an impartial Administrative Law Judge. For Part B denials, an appeal is made to the carrier hearing officer. If the carrier hearing officer affirms the denial, a request for hearing before an Administrative Law Judge may be made.

Medicare hearings are non-adversarial. The Administrative Law Judges rely on Medicare statutes and regulations rather than the criteria established by the Health Care Financing Administration which may often be more restrictive. Thus, there is a greater likelihood of success in appealing a denial of Medicare coverage at the administrative hearing level. Medicare is typically unrepresented at these hearings, and the administrative costs incurred for processing appeals are paid by the Health Care Financing Administration regardless of the outcome of the appeal (see, Medicare Administrative Appeals, ALJ Hearing Process, Office of Inspector General, Department of Health and Human Services, September 1999).

Often times, Medicare coverage is unfairly denied. The reversal rates of denials by the administrative law judges are encouraging. Therefore, if benefits are denied, it is important to challenge the denials through the appeal process.

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MEDIGAP HEALTH INSURANCE POLICIES

The workers' compensation practitioner should advise the applicant of supplemental private insurance that may be purchased within six months of becoming eligible for Medicare without the insurance company considering any pre-existing medical condition. After the six month window has elapsed, however, the individual's pre-existing medical condition will be considered by the insurance carrier in deciding to insure the individual.

Basic Medigap plans cover 365 additional days of hospitalization during an individual's lifetime, generally pays 20% of co-payments on Part B (doctors), and can have many other benefits including payment for medication.

MEDI-CAL COVERAGE

Generally, Medi-Cal is provided to recipients of Supplemental Security Income recipients. However, recipients of Social Security disability and/or retirement benefits should be made aware of potential Medi-Cal coverage. For example, a significant number of nursing home patients in California are eligible for Medi-Cal.

In addition, an injured worker may be entitled to both Title II (Social Security disability) and Title XVI (Supplemental Security Income) benefits. In such circumstances, the individual is entitled to both Medicare and Medi-Cal. Medi-Cal is a need based program. A claimant may be entitled to Medi-Cal and Supplemental Security Income benefits even after a significant workers' compensation settlement if he or she spends down the settlement amount to acceptable limits or converts the settlement to an excludable resource (e.g. a home in which the claimant resides or a car of any value to transport the individual to medical appointments).

In November, 1999, the United States Congress passed a bill known as the "Ticket to Work and Work Incentives Improvement Act of 1999." The bill contains many provisions of significance to Social Security law. One of the provisions refers to Medicaid eligibility. Effective October 1, 2000, states such as California will have the option to create two new Medicaid eligibility categories: (1) persons with disabilities who would be eligible for SSI but for their income, and (2) if the first option is provided, continuing coverage for employed individuals whose medical condition improves. Individuals covered under these options will be able to "buy in" to Medicaid.

EFFECTS OF WORKERS' COMPENSATION SETTLEMENTS ON SOCIAL SECURITY DISABILITY BENEFITS

Lastly, the workers' compensation practitioner must consider the potential effects of workers' compensation settlements on Social Security disability benefits. The general rule is that a claimant's combined Social Security disability and workers' compensation payments must not exceed 80% of his or her pre-injury earnings (see, 42 USC §424a(a). Otherwise, the claimant's disability payments will be subject to an offset. Structured settlements involving Trusts and Annuities are viewed by the Social Security Administration according to the guidelines set forth in Social Security Rulings 81-20 and 81-32. A detailed article discussing the interaction of workers' compensation settlements, Annuities and Trusts can be found in the California Workers' compensation Enquirer (September 1999 issue). ⁽⁵⁾

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ATTACHMENT A

INFORMED CONSENT

My attorney has explained that the settlement of my workers' compensation claim by Agreement with the insurance company and my employer means that workers' compensation will not be responsibly for any future medical expenses incurred after the date of signing the Agreement.

I also have been told that because I was injured on the job and collected workers' compensation benefits, if I am found disabled by the Social Security Administration and eligible for Medicare health insurance benefits, Medicare may not pay for medical expenses related to my workers' compensation injury.

I understand that this means that if my condition worsens and requires future medical treatment, the cost of this future medical treatment will be my responsibility and Medicare may not be required to pay those expenses because it was a work injury. I understand this even though Medicare will pay other non work medical expenses.

I also understand that since this condition may be considered pre-existing, it is unlikely that any private health care company will insure me for health benefits related to this workers' compensation injury.

I understand that this means that it is likely that any future medical expenses incurred related to my work injury will probably have to be paid by me out of the proceeds of this settlement. My attorney had advised me of this and has suggested that I make appropriate arrangements to ensure that I will have funds available from the proceeds of this settlement to pay any future medical expenses that may arise as a result of this injury.

I understand that the payments that are made to me through this workers' compensation settlement will be considered by the Social Security Administration in deciding on the amount of any Social Security benefit I may receive. I understand that the terms of the workers' compensation settlement are not binding on the Social Security Administration and that Social Security will make their own decision about the amount of my monthly benefits.

I understand that the acceptance of this Settlement Agreement may mean that my Social Security benefits are affected and therefore, reduced, due to the money I receive under this Settlement Agreement.

I understand that there is some risk involved and I elect to proceed and settle this workers' compensation claim, knowing of the possible adverse effect on my Social Security and/or Medicare benefits.

I have read the above and have had it explained to me by my attorney in the presence of a witness of my choice who acknowledge that the same was done in their presence on the undersigned date.

Date_______________________ ___________________________________

Claimant

Date_______________________ ___________________________________

Attorney at Law

Date_______________________ ___________________________________

Witness

State of California

County of __________________

I, _____________________________, a Notary Public for the said County and State, do hereby certify that _______________________ personally appeared before me this day and acknowledge the due execution of the foregoing instrument.

Witness my hand and official seal, this __________ day of ______________, 2000

___________________________________

Notary Public

My commission Expires:

ATTACHMENT B (the following information was taken from the "Medicare & You 2000" booklet. There may be changes in the coverage. Please see the current booklet.)

Medicare Part A (Hospital Insurance) covers:

Hospital stays: semi-private room, meals, general nursing and other hospital services and supplies. This does not include private duty nursing, a television or telephone in your room, or a private room, unless medically necessary. Inpatient mental health care coverage in a psychiatric facility is limited to 190 days in a lifetime.

For each benefit period you pay:

A total of $768 for a hospital stay of 1-60 days.

$192 per day for days 61-90 of a hospital stay.

$384 per day for days 91-150 of a hospital stay. (See Reserve Days on page 55 of the Medicare and You 2000 handbook).

Skilled Nursing Facility (SNF) Care: Semi-private room, meals, skilled nursing and rehabilitative services, and other services and supplies (after a 3-day hospital stay). For more information on SNF's and long-term care, see the Medicare and You 2000 handbook.

For each benefit period you pay:

Nothing for the first 20 days.

Up to $96 per day for days 21-100.

All costs beyond the 100th day in the benefit period.

Home Health Care: Part-time skilled nursing care, physical therapy, speech-language therapy, home health aide services, durable medical equipment (such as wheelchairs, hospital beds, oxygen, and walkers) and supplies, and other services.

You pay:

Nothing for home health care services.

20% of approved amount for durable medical equipment.

Hospice Care: Medical and support services from a Medicare-approved hospice, drugs for symptom control and pain relief, short-term respite care, care in a hospice facility, hospital, or nursing home when necessary, and other services not otherwise covered by Medicare. Home care is also covered.

You pay:

A copayment of up to $5 for outpatient prescription drugs and a $5 per day copayment for inpatient respite care (short-term care given to a hospice patient by another care giver, so that the usual care giver can rest). The copayment can change depending on where you live.

Blood: Given at a hospital or skilled nursing facility during a covered stay.

You pay:

For the first 3 pints of blood.

Medicare Part B (Medical Insurance) covers:

Medical and Other Services: Doctors' services (except for routine physical exams), outpatient medical and surgical services and supplies, diagnostic tests, ambulatory surgery center facility fees for approved procedures, and durable medical equipment (such as wheelchairs, hospital beds, oxygen, and walkers).

Also covers outpatient physical and occupational therapy including speech-language therapy, and mental health services.

You pay:

$100 deductible (pay once per calendar year).

20% of approved amount after the deductible, except in the outpatient setting.

20% of $1500 for all outpatient physical and speech therapy services and 20% of $1500 for all outpatient occupational therapy services. You pay all charges above $1500. (Hospital outpatient therapy services do not count towards the $1500 limits.).

50% for most outpatient mental health.

Clinical Laboratory Service: Blood tests, urinalysis, and more.

You pay:

Nothing for services.

Home Health Care: Part-time skilled care, home health aide services, durable medical equipment when supplied by a home health agency while getting Medicare covered home health care, and other supplies and services.

You pay:

Nothing for services.

20% of approved amount for durable medical equipment.

Outpatient Hospital Services: Services for the diagnosis or treatment of an illness or injury.

You pay:

20% of the charged amount (after deductible). During the year 2000, this will change to a set copayment amount.

Blood: Pints of blood needed as an outpatient, or as part of a Part B covered service.

You pay:

For the first 3 pints of blood, then 20% of the approved amount for additional pints of blood (after the deductible).

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Susan R. Wasserman, received her B.A. from U.C.L.A. in 1973 and her J.D. from Southwestern University School of Law in 1976. She is admitted to practice law in both California and New York. She was formerly an attorney advisor with the Social Security Administration and a former Deputy Public Defender in Contra Costa County. She was the chairperson of the Los Angeles County Bar Association, Social Security Section and has moderated panels on Social Security law including C.E.B. courses and N.O.S.S.C.R. and C.A.A.A. conference presentations. She is the proud mother of two adopted daughters from China ages 7 and 5. The Law Offices of Susan R. Wasserman represents disabled claimants throughout Southern California in Social Security disability matters exclusively.

Jennifer L. Cho, received a B.A. from U.C.L.A. in 1989. She received her Juris Doctorate from the University of West Los Angeles School of Law in 1994. She worked as a paralegal in the Law Offices of Susan R. Wasserman throughout her undergraduate and law school studies, and then joined the firm as an associate attorney upon being admitted to the California Bar in 1994.

1. . The regulations provide the following example: As the result of a work injury, an individual suffered loss of income and incurred medical expenses for which the total workers' compensation payment would have been $24,000 if the case had not been compromised. The medical expenses amounted to $18,000. The workers' compensation carrier made a settlement with the beneficiary under which it paid $8,000 in total. A separate award was made for legal fees. Since the workers' compensation compromise settlement was for one-third of the amount which would have been payable under workers' compensation had the case not been compromised ($8,000/$24,000 = 1/3), the workers' compensation compromise settlement is considered to have paid for one-third of the total medical expenses (1/3 x $18,000 = $6,000). (42 CFR §411.47(a)(2)(i)(ii).

2. . In Zinman v. Shalala, 67 F.3d 841 (9th Cir. 1995), the issue was whether Medicare Secondary Payer provisions entitled the Department of Health and Human Services to reimbursement of the full amount of the conditional Medicare payment when the beneficiary receives a discounted settlement for less than the total damages. The court concluded that the statute allows the Department of Health and Human Services to full recovery (subject to the possibility of full or partial waiver due to hardship under 42 USC §1395gg(c). Notably, the court delineated third party tort claims from awards arising from workers' compensation settlements. Specifically the court stated that "apportionment in workers' compensation settlements therefore involve a relatively simple comparison of the total settlement to the measure of damages allowed for individual components of the settlement, pursuant to a prescribed formula. Tort cases, in contrast, involve noneconomic [sic] damages not available in workers' compensation cases." (Id. at 846).

3. . It would be beneficial for the applicant to maintain a yearly log or notebook which lists the expenses not covered by Medicare, Medicare deductibles, cost for transportation to medical appointments, cost for prescription and non-prescription medications, cost for other remedies, cost for medical equipments, and cost for home modifications.

4. . See 42 CFR §§405.701 et seq. 405.801 et seq.