TN 3 (10-08)
PR 02505.014 Hawaii
A. PR 08-189 Offset for Disfigurement Payments Made Pursuant to Hawaii's Workers' Compensation System
DATE: September 23, 2008
The issue is whether Hawaii disfigurement benefits are subject to offset under Section 224 of the Social Security Act (Act). Instructions published 04/2001 in the Program Operations Manual System (POMS), section DI 52001.214 Hawaii Workers' Compensation, included the statement "Disfigurement benefits are not offsettable." However, the Office of Disability Programs was unable to determine the basis for this statement and asked the Regional Office of General Counsel for an opinion. Based on the relevant provisions of Hawaii law in Haw. Rev. Stat. § 386-32(a), § 386-54 and § 386-1, and federal law regarding treatment of disfigurement payments under Section 224 of the Act [42 U.S.C. § 424a.], it is concluded that Hawaii disfigurement payments are subject to the Act's offset provision.
The Office of Disability Programs (ODP) is updating the policy instructions regarding Workers' Compensation/Public Disability Benefits offsets pursuant to the provisions in Section 224 of the Social Security Act. The current policy indicates that disfigurement benefits paid according to the State of Hawaii's workers' compensation system are not offset. Program Operations Manual System DI 52001.214 ("Disfigurement benefits are not offsettable.").
ODP has been unable to determine when or why the provision was added to the POMS.
For the reasons set forth in our analysis below, we believe payments for disfigurement benefits as provided for by Hawaii's workers' compensation system should be offset because they are periodic payments made "on account of" disability.
Workers' Compensation Offsets
Persons injured due to a work-related injury are entitled to federal disability benefits if they are "disabled" as defined by the Social Security Act. 42 U.S.C. § 423(a). However, such benefits are reduced where the claimant is entitled to "periodic benefits on account of his or her total or partial disability" under a state workers' compensation law. 42 U.S.C. § 424a(a)(2); 20 C.F.R. § 404.408(a) (2008). The Agency reduces benefits to the extent the combined benefits exceed the applicable limit. 42 U.S.C. § 424a(a)(5); 20 C.F.R. § 404.408(c). Congress instituted this offset rule to ensure claimants did not receive income in excess of their pre-disability earnings, thereby reducing their incentive to return to work. Richardson v. Belcher, 404 U.S. 78, 82-83 (1971).
The scope of the federal offset provisions is extremely broad. Hodge v. Shalala, 27 F.3d 430, 432 (9th Cir. 1994). The offset applies to both temporary and permanent disabilities and to lump-sum awards substituting for periodic benefits. 42 U.S.C. § 424a(a)(2), (b). There are few exceptions to this offset, such as workers' compensation funds received as reimbursement for "medical, legal or related expenses" paid or incurred. 20 C.F.R. § 404.408(d); POMS DI 52001.535(A)(1), POMS DI 52001.075(2); Black v. Schweicker, 670 F.2d 108, 110 (9th Cir. 1982) (holding that lump-sum settlements for disputed claims substitute for periodic payments and noting that payments such as burial costs would be excluded from offset).
Although the specific workers' compensation system may be analyzed regarding the nature of the payment made, federal law applies when determining the parameters of the workers' compensation offset. Social Security Ruling (SSR) 97-3 ("the issue of whether SSA correctly reduced or offset benefits due to the settlement of a WC claim is governed by Federal, not State, law."); SSR 81-33 (holding it is the real nature and purpose of settlements that determines offset, even though state statutory language indicated such payments were not to be construed as weekly payments); see also, Olson ex rel. Estate of Olson v. Apfel, 170 F.3d 820, 822 (8th Cir. 1999) (federal law controls); Krystoforski v. Chater, 55 F.3d 857, 859 (3rd Cir. 1995) (same).
The Agency has successfully argued that earnings loss is not the exclusive definition of "disability" for purposes of the workers' compensation offset statute. In O~, the Court of Appeals for the Eighth Circuit agreed that permanent impairment awards, "no matter how characterized under state law, are on account of total or partial disability." O~, 170 F.3d at 825 (internal quotations and citations omitted). North Dakota's workers' compensation system distinguishes disability payments made for lost earnings from permanent impairment payments for loss of bodily function, which category also includes disfigurement. O~, 170 F.3d at 822; N.D. Cent. Code § 65-01-02(26). Such permanent impairment awards compensate for the "adverse personal and social effects of a workplace injury" rather than for presumed wage loss. O~, 170 F.3d at 824 (internal quotation and citation omitted) & n.4. The Agency argued that state law was not controlling and that the term "disability" in 42 U.S.C. § 424(a)(2)(A) should be broadly construed to include impairment awards, whether or not those awards were related to the claimant's wage loss under state law. O~, 170 F.3d at 822. The court agreed that this is an issue of statutory construction governed by federal law. O~, 170 F.3d at 822. Because the statute was ambiguous and because the Commissioner's interpretation was as plausible as the interpretation that wage loss was necessary for offset, the Agency's view "must prevail." O~, 170 F.3d at 824. Thus, the court accepted the Commissioner's argument that "disability" in this context "simply means a condition resulting from a workplace injury that entitles the claimant to periodic workers' compensation benefits." O~, 170 F.3d at 824-25. This interpretation is consistent with an understanding that all workers' compensation periodic benefits are for disabling conditions caused by workplace injuries, is simpler to administer, and eliminates incentives for states to evade the offset by characterizing their periodic benefits as for something other than wage loss. O~, 170 F.3d at 824. The court also held that all lump-sum payments available to replace wages are periodic benefits subject to offset. O~, 170 F.3d at 825. Thus, all workers' compensation payments other than those intended to reimburse specific expenses - such as medical, legal, rehabilitative, and retraining costs - are subject to the offset. O~, 170 F.3d at 825.
Hawaii's Workers' Compensation System
In Hawaii, disfigurement is included in the "permanent partial disability" section of the workers' compensation statutes. Haw. Rev. Stat. § 386-32(a). This categorization is repeated in the disfigurement section of that statute, where disfigurement awards are described as being separate from "other" permanent partial disability payments. Haw. Rev. Stat. § 386-32(a). The permanent partial disability statute includes a list of body part losses and defines the number of week's wages to be paid as compensation for each such loss. Haw. Rev. Stat. § 386-32(a).
As to disfigurement:
In cases of personal injury resulting in disfigurement the director may award compensation not to exceed $30,000 as the director deems proper and equitable in view of the disfigurement. Disfigurement shall be separate from other permanent partial disabilities and shall include scarring and other disfiguring consequences caused by medical, surgical, and hospital treatment of the employee.
Haw. Rev. Stat. § 386-32(a). Unlike many other states, Hawaii does not require that the disfigurement be generally visible. Haw. Rev. Stat. § 386-32(a); Cuarisma v. Urban Painters, Ltd., 583 P.2d 321, 323 (Hawaii 1978) (noting disfigurement consisted of surgical scars on back and neck).
For all permanent partial disability, payments are made in "weekly installments" at a specified rate and are paid "regardless of the earnings of the disabled employee subsequent to the injury." Haw. Rev. Stat. § 386-32(a). Workers' compensation payments may be converted into one or more lump-sum payments. Haw. Rev. Stat. § 386-54. Also noteworthy, Hawaii defines disability as the "loss or impairment of physical or mental function." Haw. Rev. Stat. § 386-1. Thus, disfigurement payments are made for "a claim arising out of an injury  received on the job" and is a "condition resulting from a workplace injury." B~, 670 F.2d at 110; O~, 170 F.3d at 824-25.
As to whether the payments are periodic, $30,000 is the maximum payment for a disfigurement, but such payments are made weekly. Haw. Rev. Stat. § 386-32(a). Even were the payments made as a lump-sum, this would simply be a substitute for the weekly payments and thus would still be offset. Haw. Rev. Stat. § 386-54.
In sum, the Office of Disability Programs is well within its discretion to decide that disfigurement payments made pursuant to Hawaii's workers' compensation system should be offset. The Office of Program Law concurs.