SSR 81-33: SECTION 224 (42 U.S.C. 424) DISABILITY -- REDUCTION OF BENEFITS DUE TO RECEIPT OF WORKMEN'S COMPENSATION -- TREATMENT OF CERTAIN LUMP-SUM SETTLEMENTS UNDER IOWA LAW

20 CFR 404.408

SSR 81-33

Section 86.44 of the Iowa Code provides that, in certain specified situations, disputed workmen's compensation claims can be settled by payment of a lump sum amount which, when approved by the workmen's compensation Commission, is binding on all parties and bars further rights under the State's workmen's compensation law. That section also provides that 'such payment shall not be construed as the payment of weekly compensation'. Held, that it is the real nature and purpose of the payment rather than the words used to describe it that ultimately controls its characterization; and since lump-sum payments under section 86.44 of the Iowa Code are commutations of, or substitutes for, periodic payments, they are workmen's compensation benefits for purposes of the offset provisions of section 224 of the Social Security Act.

A question has been raised whether lump-sum settlements under section 86.44 of the Iowa Code are WC benefits subject to the offset provisions of section 244 of the Act.

Section 86.44 of the Iowa Code establishes a procedure for settlement of certain employer-employee disputes in WC cases. The settlement procedure may be used only in a limited number of situations. The Commissioner's approval makes the settlement binding on all parties to the dispute and constitutes a final bar to any further rights arising under the State's WC laws. Section 86.44 concludes with language that is the source of the interpretive difficulty in this case: "such payment shall not be construed as the payment of weekly compensation." This language raises the question of whether a settlement under section 86.44 is exempt from the offset provisions of section 224 of the Social Security Act.

Congress, through enactment of section 224, directed that disability and auxiliary benefits be reduced under a formula designed to limit the total payments of Social Security and WC benefits to eighty percent of the worker's "average current earnings." Section 224(b) of the Act provides:

If any periodic benefit under a WC law or plan is payable on other than a monthly basis (excluding a benefit payable as a lump sum except to the extent that it is a commutation of, or a substitute for, periodic payments), the reduction under this section shall be made at such time or times and in such amounts as the Secretary finds will approximate as nearly as practicable the reduction when benefits are payable on a monthly basis.

Arthur Larson, in his treatise The Law of Workmen's Compensation, III § 97.34 (1973 ed.), analyzes a number of judicial decisions that have applied the Social Security offset provision to lump-sum payments under various State WC laws. Larson concludes that the great majority of decisions have construed lump-sum payments to be subject to the offset provision. According to Larson, judicial decisions have established that --

"It is the real nature and purpose of the payment rather than the words used to describe it that ultimately controls. And, if what the claimant gives up in exchange for the settlement is his right to periodic payments, it does not matter that the calculation of the lump-sum amount itself cannot be shown to have been arrived at by actuarial methods applied to the value of future periodic payments."

The reported decisions confirm Larson's conclusion. In Ladner v. Secretary of Health, Education & Welfare, 304 F.Supp. 474 (S.D. Miss. 1969), the court pointed out that lump-sum payments would escape the operation of the offset provision only when such payments reimbursed workers for medical, legal, and other related expenses incurred in connection with their WC claims. The court quoted from Senate Report No. 404, United States Code Congressional and Administrative News, 1965, page 2200-2201:

"Since in some workmen's compensation cases, workers incur late medical, legal or related expenses in connection with their workmen's compensation claims, or in connection with the injuries they have suffered, and since the workmen's compensation awards are generally understood to include compensation for these expenses (except to the extent that special provision is made in the award to cover them or they ar provided without cost to the worker), for purposes of this section the Secretary would not, in computing the amount of the periodic benefit payable to an individual under a workmen's compensation program, include any part of the workmen's compensation lump sum or benefit which he finds is equal to the amount of such expenses paid incurred by the worker."

Thus, Congress intended that lump-sum payments be considered exempt from the offset provision only to the extent that they represent the "expenses" specified in the Senate Report. A lump-sum payment pursuant to a settlement under section 86.44 of the Iowa Code clearly would not be confined to reimbursement for legal, medical, or other related expenses connected with an employee's WC claim.

Although section 86.44 states that a settlement "shall not be construed as the payment of weekly compensation," it does not state that a settlement shall not be construed as a commutation of, or a substitute for periodic benefits. On the contrary, 86.44 settlements are to be construed as commutations of, or substitutions for, periodic benefits because they bind all parties to the dispute and preclude the possibility of further remedies under Iowa WC laws, remedies that would normally lead to periodic payments.

Similarly, the court in Walters v. Flemming, 185 F.Supp. 288 (Dist. of Mass. 1960) ruled that a lump-sum payment to an injured employee was subject to the WC offset provision when the employee accepted the payment in exchange for the surrender of his claim to future periodic payments. The court said:

"The fact that plaintiff had no absolute right to receive such a substitute and that a lump-sum payment could be made only by agreement of the parties, subject to approval by the division of industrial accidents, . . . does not in any way alter the nature of the lump-sum payment when made. It is still received in redemption of the future periodic payments and as a substitute for them."

Finally, the Supreme Court's decision in Richardson v. Belcher, 92 S.Ct. 254 (1971), which upheld the constitutionality of the offset provision of the Act, should be considered. In Belcher, the court examined the Congressional purpose behind the offset provision (at 258):

"Data submitted to the legislative committees showed that in 35 of the 50 States a typical worker injured in the course of is employment and eligible for both state and federal benefits received compensation for his disability in excess of his take-home-pay prior to the disability. It was strongly urged that this situation reduced the incentive of the worker to return to the job, and impeded the rehabilitative efforts of the state programs. Furthermore, it is anticipated that a perpetuation of the duplication and benefits might lead to the erosion of the workmen's compensation programs."

If settlements under section 86.44 of the Iowa Code were held to be exempt from the Act's offset provision, only those Iowa employees who received a lump-sum payment as a result of a settlement agreement would receive both a full WC benefit and a full disability benefit under the Act. Such a situation would certainly tend to impede the rehabilitative efforts of the Iowa WC program and result in the erosion of the program by encouraging employees to seek settlements rather than pursue their claims to the full extent provided by Iowa law. Moreover, workers with the least meritorious claims might be unduly rewarded if the offset provision did not apply to 86.44 settlements as well as to regular WC payments.

In conclusion, settlements under section 86.44 of the Iowa Code are subject to the offset provisions of section 224 of the Act.

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