If you’ve had a work-related injury or illness, you probably qualify for workers' comp benefits to replace a portion of your lost wages and to pay for medical care. When you eventually reach the end of the lengthy workers’ comp process, you’ll want to understand your settlement or award.
Naturally, your first concern will be how much of the money you’ll get to keep. This article outlines some of the common items that may be deducted from your workers’ comp settlement or award.
Workers' Comp Deduction for Attorneys’ Fees and Costs
In almost every state, workers’ comp lawyers charge what’s known as a “contingency fee,” which means they don't charge anything up front. Instead, they receive a percentage of the settlements or awards they win for their clients.
Many states, including California, prevent attorneys from taking a percentage of benefits that are routinely covered (such as medical benefits or temporary disability payments), unless they had to fight for those benefits after the insurance company resisted paying.
Most states set a maximum percentage for attorneys’ fees, typically 10% to 20%. The percentage may vary depending on how complicated the case is. (Our survey on the cost of workers’ comp lawyers showed they received an average of 15%.)
If you had a fee agreement with your lawyer, it probably stated the percentage that the attorney expected. However, the workers’ comp judge or another official from the state agency usually must approve the final amount.
If your lawyer agreed to advance the costs of pursuing your workers’ comp case—such as expert witness fees and medical record requests—those expenses will also be deducted from your settlement or award.
Workers' Comp Deduction for Doctors’ Liens
Your workers’ comp settlement or award may include an amount for medical bills that the insurance company hasn’t already paid—because it denied your claim or refused to pay for treatment that you needed.
In this situation, some doctors or other health care providers will agree to take payment later from your future workers’ comp award or settlement, by filing what’s known as a doctor’s lien.
The amount of the unpaid medical bills will then come out of the settlement or award—although your attorney might manage to reduce the bills by negotiating with the medical providers.
Workers' Comp Deduction for Permanent Disability Advances
In some cases, your employer or its insurance company may pay permanent disability benefits prior to a final settlement or award.
The laws in some states require this. In California, for instance, permanent disability payments must start within 14 days after temporary disability ends (usually when your condition has stabilized). In states where this isn’t a legal requirement, some employers or insurance companies may agree to advance permanent disability benefits.
Any permanent disability advances that you’ve received will be credited to the insurance company and deducted from your settlement or award.
Workers' Comp Deduction for Medicare Repayments and Set-Asides
If Medicare or Medicaid paid any medical bills for your work injury while your employer’s insurer was refusing to cover those bills, you’ll have to pay back the conditional payments out of your settlement or award. This is because Medicare and Medicaid are “secondary payers,” which means they aren’t responsible for medical bills covered by other insurance.
Also, if your settlement or award includes money for future medical expenses, you’ll need to put a portion of the funds in a Medicare Set-Aside Account to cover expenses that Medicare would otherwise pay.
The rules for setting up, funding, and managing these accounts are complex, and getting it wrong can have serious financial consequences. An experienced workers’ comp attorney should be able structure an appropriate Medicare set-aside and walk you through the process.
Other Deductions from Workers’ Comp Settlement or Awards
If you’ve received unemployment compensation while your employer’s insurance company denied your workers’ comp claim, you’ll likely have to reimburse the state for the unemployment payments once your receive a settlement or award.
Money from your settlement or award could also go to pay what you owe for overdue child support, although some states limit how much can be taken out for this purpose. (Learn more about the effect of workers’ comp benefits on child support.) Here again, a good workers’ comp lawyer may be able to negotiate reductions in what you owe to ensure that you can keep more of your benefits.
Workers' Comp Benefits and Settlements: Are They Taxable?
You generally don’t have to pay state or federal income taxes on workers’ comp benefits or settlements. However, if you receive interest on overdue benefits as part of your award or settlement, you may have to pay taxes on that amount.
Also, taxes may come into play if you receive both workers’ comp and Social Security Disability Insurance (SSDI) benefits, and your combined benefits are more than 80% of your average earnings before you became disabled.
In that case, your SSDI payments may be reduced (called an “offset”) to account for your workers’ comp benefits. The offset is taxable income. (For details on the offset, see Nolo’s article on taxes and workers’ compensation.)
Contact an Attorney
If you need help filing or appealing a workers' comp claim, contact an experienced workers' comp attorney.