BASIC (03-05)

PR 02505.054 West Virginia

A. PR 05-079 Terms of Proration Used in a West Virginia Workers' Compensation Lump-Sum Award - SSN ~

DATE: January 25, 2005

1. SYLLABUS

The beneficiary reached a compromise and release agreement with the WVWCC in his workers' compensation (WC) case. As part of this agreement, the WVWCC agreed to pay D~ a lump-sum of $100,000. In this agreement, the parties noted that D~'s life expectancy was approximately 25 years. In light of that life expectancy figure, the parties proposed to prorate the lump-sum "for Social Security purposes to a monthly benefit of $115.69 through November 2014, the attainment of FRA, and then $876.79 a month benefit for the remaining life expectancy of the claimant." The proposed allocation rate was "unusual" and would result in no offset. The issue of prorating lump-sum awards is addressed in SSR 97-3. Specifically, the Agency stated that, based on offset provisions of the Act, case law, and Agency policy, it was not necessarily bound by the terms of a second, or amended, stipulation in determining whether and by what rate a disabled worker's Social Security disability insurance benefits should be offset on account of a workers' compensation lump-sum payment. SSR 97-3. Rather, the Agency will evaluate both the original and amended stipulations and disregard any language which has the effect of altering the terms in the original lump sum settlement where the terms in the amended document are "illusory" or conflict with the terms of the first stipulation concerning the actual intent of the parties, and where the terms in the amended document "would have the effect of circumventing" the offset provisions of the Act. The Agency reasoned that to give effect to such "illusory terms would frustrate Congress' intent to avoid duplicate benefits." The Agency did not address "the related issue of the validity of stipulated lump-sum settlements where the original settlement contains a term purporting to prorate a lump-sum over the life expectancy of the worker."

In this case, the parties proposed to prorate the lump-sum "for Social Security purposes" to a monthly benefit of $115.69 through November 2014, and then a monthly benefit of $876.79 for the remaining life expectancy of D~. Based on the first step of the prorating instructions set forth in the POMS, the Agency would appear to be bound by the rate specified in D~'s WC lump-sum agreement. POMS § DI 52150.065.

However, the two-tiered allocation rate based on the life expectancy of D~ does not accurately represent the amount that D~ would have received if his benefits were paid monthly. Consequently, D~'s agreement runs counter to the expressed intent of Congress to prevent claimants from receiving excessive benefits. Therefore, the Agency should disregard the proration terms of D~'s WC lump-sum settlement.

2. OPINION

QUESTION PRESENTED

You have asked us whether the Social Security Administration (Agency) is bound by the monthly allocation rate set forth in a lump-sum workers' compensation settlement agreement between Earl D~ (D~) and the West Virginia Worker's Compensation Committee (WVWCC). You have also asked what specific allocation terms should be used if the Agency is not bound by the allocation rate set forth in the settlement agreement.

SUMMARY

For the reasons stated below, we believe that the Agency is not bound by the monthly allocation rate set forth in D~'s lump-sum workers' compensation settlement agreement. Further, because there is no evidence of a preceding periodic benefit, the Agency should prorate the lump-sum award at West Virginia's Workers Compensation maximum in effect on the date of D~'s injury.

BACKGROUND

The evidence you provided indicates that D~ reached a compromise and release agreement with the WVWCC in his workers' compensation case. As part of this agreement, the WVWCC agreed to pay D~ a lump-sum of $100,000. In this agreement, the parties noted that D~'s life expectancy was approximately 25 years. In light of that life expectancy figure, the parties proposed to prorate the lump-sum "for Social Security purposes to a monthly benefit of $115.69 through November 2014, then $876.79 a month benefit for the remaining life expectancy of the claimant." You indicated that the proposed allocation rate was "unusual" and would result in no offset in D~'s Social Security benefits.

DISCUSSION

The Act provides that any person who is "disabled" as defined in the Act is eligible to receive Social Security benefits. 42 U.S.C. § 423(a). The Act, however, imposes limits on the amount of benefits that an individual may collect from the combination of both federal Social Security benefits and state workers' compensation benefits. 42 U.S.C. § 424a(a)(3) (6). Specifically, if an individual is receiving both Social Security disability benefits and state workers' compensation benefits, the Commissioner shall reduce the Social Security benefits by the amount necessary to ensure that the sum of the state and federal benefits does not exceed eighty percent of the individual's prior average earnings. 42 U.S.C. § 424a(a)(5); 20 C.F.R. § 404.408.

Congress instituted these "offset" provisions because in most states the combined benefits claimants were receiving surpassed the claimant's pre injury earnings. Freeman v. Harris, 625 F.2d 1303, 1306 (5th Cir.1980). "This was thought to cause two evils: first, it reduced a worker's incentive to return to the workplace and hence impeded rehabilitative efforts; and second, it created fears that the duplication of benefits would lead to an erosion of state workers' compensation programs." Id. (citing Hearings on H.R. 6675 Before the Senate Comm. on Finance, 89th Cong., 1st Sess. 151, 252, 259, 366, 540, 738 40, 892 97, 949, 990 (1965)). As the Supreme Court has explained, "by limiting total state and federal benefits to eighty percent of the employee's average earnings prior to the disability, [section 224 of the Act] reduce[s] the duplication inherent in the programs and at the same time allow[s] a supplement to workmens' compensation where the state payments [are] inadequate." Richardson v. Belcher, 404 U.S. 78, 83 (1971).

As a result of these offset provisions, when a beneficiary receives a lump-sum payment that is a commutation of, or a substitute for, periodic benefits, the Act requires the Commissioner to prorate that lump-sum payment. 42 U.S.C. § 424a(b). Therefore, the first question for the Agency to consider is whether D~'s lump-sum payment is a substitute for periodic payments. Significantly, the claimant retains the burden of showing what part of the lump-sum settlement, if any, is not a substitute for periodic payments. Campbell v. Shalala, 14 F.3d 424, 428 (8th Cir. 1994) (citing Black v. Schweiker, 670 F.2d 108 (9th Cir. 1982)).

In this case, we believe that the entire lump-sum amount is a commutation of periodic payments because there is no evidence to the contrary. Indeed, there is no evidence in the settlement agreement that any portion of the lump-sum payment was based on medical, legal or other related expenses. See 20 C.F.R. § 404.408(d). Moreover, D~'s desire to use a two-tiered allocation rate over his life expectancy "for Social Security purposes" suggests that D~ was attempting to avoid the Act's offset provision because the parties recognized that the lump-sum settlement was a commutation of periodic payments. Accordingly, we believe that the Act requires the Commissioner to prorate the entire lump-sum amount.

Because this is a lump-sum commutation case, the Act instructs the Commissioner to offset the Social Security benefits at a rate that will "approximate as nearly as practicable" the rate at which the award would have been paid on a monthly basis. 42 U.S.C. § 424a(b). Congress "has thus delegated to the Commissioner the task of determining the proper offset rate for lump-sum or non-monthly periodic payments" and, while state law may be helpful to understand the nature of a state's workers' compensation lump-sum award, the "ultimate responsibility for determining the offset rate is in the hands of the Commissioner, not the states[.]" Bubnis v. Apfel, 150 F.3d 177, 181-82 (2d Cir. 1998). See also Krysztoforski v. Chater, 55 F.3d 857, 859 (3d Cir. 1995) (holding that federal law, not state law, controlled when determining workers' compensation offset amounts).

The Program Operation Manual System ("POMS") contains instructions on how to prorate a lump-sum workers' compensation award. The POMS set forth a three step procedure for prorating a state lump-sum award "at an established weekly rate." Under the POMS, the Agency is to follow three steps in priority order:

1. The rate specified in the lump sum award ["Step 1"].

2. The periodic rate paid prior to the lump sum (if no rate is specified in the lump sum award) ["Step 2"].

3. If [workers' compensation], the State's [workers' compensation] maximum in effect in the year of injury. This figure can be used if no rate is specified in the award or there was no preceding periodic benefit. It can also be used pending post adjudicative development of the rates specified in 1 or 2 ["Step 3"].

POMS § DI 52150.065.

The Agency also addressed the issue of prorating lump-sum awards in SSR 97-3. Specifically, the Agency stated that, based on offset provisions of the Act, case law, and Agency policy, it was not necessarily bound by the terms of a second, or amended, stipulation in determining whether and by what rate a disabled worker's Social Security disability insurance benefits should be offset on account of a workers' compensation lump-sum payment. SSR 97-3. Rather, the Agency will evaluate both the original and amended stipulations and disregard any language which has the effect of altering the terms in the original lump sum settlement where the terms in the amended document are "illusory" or conflict with the terms of the first stipulation concerning the actual intent of the parties, and where the terms in the amended document "would have the effect of circumventing" the offset provisions of the Act. Id. The Agency reasoned that to give effect to such "illusory terms would frustrate Congress' intent to avoid duplicate benefits." Id. The Agency did not address "the related issue of the validity of stipulated lump-sum settlements where the original settlement contains a term purporting to prorate a lump-sum over the life expectancy of the worker." Id.

In this case, the parties proposed to prorate the lump-sum "for Social Security purposes" to a monthly benefit of $115.69 through November 2014, and then a monthly benefit of $876.79 for the remaining life expectancy of D~. Based on the first step of the prorating instructions set forth in the POMS, the Agency would appear to be bound by the rate specified in D~'s workers' compensation lump-sum agreement. POMS § DI 52150.065.

However, applying step one of the instructions in this case, and enforcing the amount specified in D~'s lump-sum agreement would produce results contrary to the Commissioner's responsibility under the Act. Indeed, according to your memo, this type of allocation rate is unusual and would result in no reduction of Social Security benefits. See also W. Va. Code Ann. § 23-4-6(d) (stating that benefits for permanent disability are paid to the claimant at a rate of sixty-six and two-thirds percent of his average weekly wage earnings at the time of injury, with minimum and maximum levels based on the weekly average wage in West Virginia, until the claimant reaches the age necessary to receive Social Security old age benefits); W. Va. Code Ann. § 23-4-18 ("Payments may be made in the periodic installments determined by the commission in each case, but in no event less frequently than semimonthly for any temporary award and monthly for any permanent award"). Therefore, the two-tiered allocation rate based on the life expectancy of D~ does not accurately represent the amount that D~ would have received if his benefits were paid monthly. See 42 U.S.C. § 424a(b) (stating that in lump sum commutation cases, the Commissioner must offset the Social Security disability benefits at a rate that will "approximate as nearly as practicable" the rate at which the award would have been paid on a monthly basis). Consequently, D~'s agreement runs counter to the expressed intent of Congress to prevent claimants from receiving excessive benefits.

Moreover, although the settlement agreement between D~ and WVWCC does not appear to be a second, or amended, agreement, it is reasonable to conclude that the terms regarding the allocation rates in the settlement agreement were included for the purpose of circumventing the offset of provisions the Act. Therefore, while SSR 97-3 does not directly apply to this case, it appears that the terms of proration set forth in the settlement agreement between D~ and WVWCC would violate the Agency's policy of disregarding "illusory" terms that "would have the effect of circumventing" the offset provisions the Act. SSR 97-3.

Accordingly, in this case, we do not believe that the Commissioner is bound by step one of the instructions regard