Learn How Settlement Awards Affect SSDI and SSI Payments

How Settlement Awards Impact Your SSDI or SSI Monthly Payment

When you receive a settlement award—money from a legal case, accident claim, or structured settlement—the Social Security Administration may count some or all of that money as your income or resources. This can change how much you receive each month through SSDI (Social Security Disability Insurance) or SSI (Supplemental Security Income). Understanding this connection is important because the impact differs based on which program you receive and how the settlement money is structured.

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SSDI and SSI have different rules about how they treat outside money. SSDI is primarily an income-based program that looks at your work history and what you earned before becoming disabled. SSI is a needs-based program, meaning it looks at your current financial situation, including money you have saved and money coming in. Both programs have limits, but they apply those limits in different ways.

When a settlement arrives, Social Security will examine whether it counts as "income" (money you receive in a month) or "resources" (money you have saved or own). This distinction matters because the programs calculate their payments differently based on these categories. A settlement that exceeds certain thresholds can reduce or even stop your monthly payments temporarily or permanently, depending on the amount and how you handle it.

The timing of when you receive settlement money also affects your payments. If you receive it all at once, it may impact your payments more severely than if it arrives in installments over time. Some settlements are structured to pay out over months or years specifically to avoid triggering large reductions in government benefits.

Practical Takeaway: Before accepting any settlement offer, ask the other party's attorney whether the settlement can be structured as periodic payments rather than a lump sum. Request information from Social Security about how the specific settlement you expect will affect your payments. Keep records of all settlement documents to share with Social Security.

Understanding SSDI Rules for Settlement Payments

SSDI recipients face specific rules about settlement money that relate to their past work history and current income. Because SSDI is based on your Social Security work record, the program has what's called an "earned income exclusion." This means SSDI counts money differently depending on whether it comes from work you perform or from other sources like settlements.

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For SSDI, a settlement award typically counts as "unearned income." The program allows you to exclude $65 per month of unearned income, and then it counts 50% of the remaining amount against your benefits. This means if you receive a settlement that equals $200 in a single month, Social Security would count $67.50 toward your earnings limit ($200 minus $65 excluded equals $135; then 50% of $135 equals $67.50).

SSDI also has a "substantial gainful activity" (SGA) limit. For 2024, SGA is $1,550 per month for non-blind disabled workers and $2,590 for blind individuals. If your monthly income—including settlement money—exceeds this limit, you may lose SSDI benefits for that month. However, SSDI has a trial work period where you can test your ability to work and earn money without losing benefits, but this doesn't apply to settlement payments.

One important feature of SSDI is that if your settlement is structured as a structured settlement annuity (payments over time through an insurance company), Social Security may treat each payment differently depending on how it's set up. Some structured settlements can be arranged so monthly payments stay under the SGA limit, protecting your SSDI benefits.

The work incentive program within SSDI called "Plan to Achieve Self-Support" (PASS) allows some SSDI recipients to set aside money for work-related goals without it counting against their benefits. A settlement could potentially be used as part of a PASS plan, though this requires specific planning and approval from Social Security.

Practical Takeaway: SSDI recipients should calculate what their settlement payment will be each month and compare it to the current SGA limit. Contact Social Security's work incentives planning and assistance program (a free service) before depositing settlement money to learn how your specific settlement will affect your benefits.

Understanding SSI Rules for Settlement Payments

SSI has stricter rules about outside money because it's a needs-based program designed for people with limited income and resources. SSI applicants and recipients must stay under specific resource and income limits to receive payments. For 2024, the resource limit for SSI is $2,000 for individuals and $3,000 for married couples. Resources include cash, bank accounts, investments, vehicles, and property, but not your primary home or one vehicle typically used for transportation.

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When you receive a settlement award as an SSI recipient, that money immediately counts toward your $2,000 resource limit. If your settlement causes your total resources to exceed $2,000, you become ineligible for SSI payments. You remain ineligible until your resources drop back below the $2,000 limit through spending or other means. This is different from SSDI, where income and resources affect the amount you receive rather than your overall eligibility.

SSI has an "in-kind support and maintenance" (ISM) rule that can also affect SSI payments. If part of your settlement is used to pay for food or shelter that you receive from someone else (for example, someone uses settlement money to pay your rent), that may be counted as income reducing your SSI payment. The rules about ISM are complex and depend on your living situation and family relationships.

SSI does have some protections for settlement money if you can separate it into specific accounts. The "dedicated account" rule allows SSI recipients to deposit settlement funds into an account that is separate from other money and used only for specific purposes related to your disability. This requires careful documentation and is not automatic—you must set it up properly and notify Social Security about it.

An "ABLE account" is another option for SSI recipients. ABLE accounts allow you to set aside up to $17,000 per year (in 2024) without it counting toward your $2,000 resource limit. Some settlement money can be deposited into an ABLE account, giving you a way to save without losing SSI eligibility. However, there are annual contribution limits and income restrictions for opening an ABLE account.

Practical Takeaway: SSI recipients must notify Social Security about any settlement before depositing it. Explore whether setting up a dedicated account or ABLE account might allow you to keep the settlement money without losing eligibility. Consult with a benefits planning advisor to understand the best way to handle your specific settlement.

Settlement Structures and Their Financial Impact

How your settlement is structured—whether you receive it as a lump sum, structured installments, or periodic payments—significantly affects how Social Security treats it. Different structures create different consequences for your benefits, and sometimes a settlement can be negotiated to minimize harm to your SSDI or SSI payments.

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A lump-sum settlement is a single payment of the entire amount. For SSI recipients, a large lump sum can immediately make you ineligible because it exceeds the $2,000 resource limit. For SSDI recipients, a lump sum in one month creates high income in that month, which could reduce or eliminate your benefit payment. However, once you spend down the lump sum (for SSI) or the month passes (for SSDI), your benefits typically resume.

A structured settlement is an agreement where the defendant or insurance company pays you in installments over a set period, often through a structured settlement annuity purchased from an insurance company. These payments are typically scheduled monthly, quarterly, or annually. For SSDI, structured payments can be managed so each payment stays under the SGA limit, protecting your work benefits. For SSI, structured payments still count toward your resources, but they arrive gradually rather than all at once, potentially allowing you time to spend down or plan for the impact.

A periodic payment settlement spreads the money over time but differs from a structured settlement because it comes directly from the defendant or their insurance rather than through a structured settlement company. The tax treatment and benefit treatment can differ between periodic payments and structured settlements, so understanding the difference matters.

Some settlements include both a lump sum and periodic payments. For example, you might receive $50,000 immediately and then $500 per month for 10 years. This hybrid approach can sometimes be negotiated to minimize impact on benefits—keeping the immediate payment smaller and larger periodic payments, or vice versa.

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