A settlement can reduce or stop your SSDI payments, depending on what kind of settlement it is

If you receive money from a lawsuit or settlement, Social Security will count some or all of it as income or resources. This can lower your monthly SSDI payment, or pause it entirely until the money runs out. The outcome depends on whether the settlement is for lost wages, medical bills, pain and suffering, or something else — and whether it's structured as a lump sum or paid over time.

The most important rule: tell Social Security about any settlement before you deposit it. If you don't report it and they find out later, you may have to repay months of overpaid benefits, plus face penalties. The reporting requirement exists even if you think the settlement shouldn't count.

Key Takeaways

  • Settlements for lost wages or lost benefits count as income and can reduce your SSDI payment dollar-for-dollar in the month you receive them.
  • Settlements for medical expenses, pain and suffering, and attorney fees usually do not count as income, but the rules depend on how the settlement document describes each portion.
  • A structured settlement — money paid to you over months or years instead of a lump sum — may reduce your benefits over a longer period rather than all at once.
  • You must report the settlement to Social Security within 10 days of receiving it, even if you believe it should not affect your benefits.
  • Social Security will ask for a copy of the settlement agreement to determine which parts count as income and which do not.

What counts as income and what does not

Social Security divides settlements into two categories: countable income and non-countable income. The category depends on what the settlement actually compensates you for, not what you choose to call it.

Settlements for lost wages — money you would have earned if you had not been injured or disabled — count as income in the month you receive them. If your settlement is $5,000 and your SSDI payment is $1,200, Social Security will reduce that month's payment by $5,000, which means you receive nothing that month and carry forward a credit of $3,800 to the next month.

Settlements for medical expenses, pain and suffering, emotional distress, and punitive damages (damages meant to punish the defendant) typically do not count as income. Neither do attorney fees paid directly from the settlement. However, Social Security will only accept this if the settlement agreement or court order specifically breaks down the award by category. If the agreement says "total settlement: $50,000" with no breakdown, Social Security may count the entire amount as income.

Settlements for future medical care are treated differently depending on whether they are set aside in a special account. If the settlement creates a dedicated fund for your medical bills, Social Security may not count it as income — but you must set it up correctly and report it to them.

How lump-sum settlements affect your monthly payment

When you receive a settlement all at once, Social Security counts it as income in the month you get it. This can create a sharp drop in your benefits for that month and possibly the next, depending on the amount.

Here is how the math works: Social Security allows you to earn $65 per month (in 2024; this amount changes yearly) before they reduce your SSDI payment. Above that, they deduct $1 from your benefit for every $1 you earn. So if you receive a $10,000 countable settlement in March, Social Security counts it as income for March. They subtract the $65 monthly allowance, leaving $9,935 in countable income. Your SSDI payment for March drops by $9,935 — which means you likely receive nothing that month. The remaining balance carries into April and reduces that month's payment too, until the full amount is used up.

The impact is temporary: once the settlement money is exhausted as income, your regular SSDI payment resumes. However, if you deposit the settlement into a bank account and it sits there, Social Security may also count it as a resource (money you own) rather than just income. SSDI allows you to have up to $2,000 in resources; above that, you become ineligible. This is a separate rule from the income rule, and both can explore.

How structured settlements work differently

A structured settlement is an agreement to receive the settlement money in installments over months or years, rather than all at once. For example, instead of receiving $100,000 today, you might receive $5,000 per month for 20 months.

Structured settlements can reduce the impact on your SSDI because the money counts as income only in the months you actually receive it. If you receive $5,000 in March and it is countable income, only that month's payment is reduced — not future months. This spreads the benefit reduction across a longer period and may allow you to keep some SSDI payment each month rather than losing it entirely.

However, the settlement agreement must be legally binding and irrevocable — you cannot change your mind and ask for the money all at once. If the agreement allows you to receive the money early or in a lump sum at your request, Social Security may treat it as if you already have access to the full amount, which could affect your resources and income calculations.

The resource limit and why it matters

SSDI has a resource limit of $2,000 for an individual (higher for couples). Resources include cash, bank accounts, stocks, and property you own. A settlement that sits in your bank account counts toward this limit.

If your settlement is $50,000 and you deposit it, your resources jump to $50,000 (or more, if you already had savings). This makes you ineligible for SSDI, even if the settlement itself should not count as monthly income. You remain ineligible until your resources drop back below $2,000 — which means you have to spend down the settlement money on living expenses, medical care, or other costs.

Some settlements can be protected from the resource limit if they are set aside for future medical care in a special account called an ABLE account or a pooled trust. These are complex arrangements that require legal help to set up correctly. If you think your settlement might may have access to, ask a disability lawyer or your local disability rights organization before you deposit the money.

How to report a settlement to Social Security

You must report any settlement to Social Security within 10 days of receiving it. You can report it by phone, in person at your local Social Security office, or online through your my Social Security account.

When you report, have the following ready: the date you received the settlement, the total amount, and a copy of the settlement agreement or court order. The agreement should show how much was awarded for each category (lost wages, medical bills, pain and suffering, attorney fees, and so on). If you do not have a breakdown, ask your attorney or the defendant's insurance company for one before you contact Social Security.

Social Security will send you a notice explaining how the settlement affects your benefits. If you disagree with their decision, you have the right to request reconsideration within 60 days. A disability lawyer can help you challenge the decision if you believe Social Security miscounted the settlement.

What happens if you do not report the settlement

If you receive a settlement and do not tell Social Security, they may discover it later through bank records, tax documents, or other sources. When they do, they will treat you as having been overpaid for the months you should have reported it. You will have to repay the overpaid benefits — sometimes a large amount — and you may face additional penalties.

Overpayments can be collected by reducing your future SSDI payments, intercepting tax refunds, or taking other collection actions. Repaying a large overpayment can take years. Reporting the settlement upfront, even if it reduces your benefits, is always better than facing an overpayment later.

Frequently Asked Questions

Does a settlement for pain and suffering reduce my SSDI?

Not if the settlement agreement specifically identifies it as pain and suffering, emotional distress, or punitive damages. Social Security will only accept this if the agreement breaks down the award by category. If the settlement is a single lump sum with no breakdown, Social Security may count all of it as income.

What if my settlement is for future medical care?

Settlements set aside for medical expenses in a dedicated account may not count as income or resources, but the account must be set up correctly. You will need to work with a lawyer or disability advocate to create the account and notify Social Security. If the money is in your regular bank account, it counts as a resource.

Can I avoid the resource limit by spending the settlement quickly?

You can spend the settlement on legitimate living expenses, medical care, or home modifications without penalty. However, if you spend it on gifts or transfers to others, Social Security may treat that as an attempt to avoid the resource limit and penalize your benefits. Spend the money on yourself or your household.

If I receive a structured settlement, does it affect my benefits every month?

Only in the months you actually receive a payment. If your structured settlement pays you $3,000 in March and $3,000 in April, your benefits are reduced in those two months only. In months with no payment, your regular SSDI payment continues unchanged.

What if Social Security and I disagree about what the settlement counts as?

You can request reconsideration within 60 days of the notice. Bring the settlement agreement and any documentation showing what each part of the award was for. A disability lawyer can represent you in this dispute and may be able to recover attorney fees if you win.