When you become disabled and can no longer work and earn an income, your disability insurance makes a payment to you each month during your benefit period or until you recover from the disability. In virtually every case, you’ll never have to pay back any of your disability insurance benefits.
However, when you receive both disability insurance benefits from multiple sources, like from a private insurer and Social Security disability insurance (SSDI), the amount you receive in SSDI should be deducted from the amount the disability insurance company owes you. You may be required to pay back the disability insurance company for any amount it pays you in excess of its obligation.
Most long-term disability insurance (LTDI) policies contain a rule, called the offset provision, that requires you to apply for SSDI in addition to claiming LTDI benefits. If your LTDI policy has this provision and you receive SSDI payments, your LTDI benefits will be reduced by the amount you received in SSDI.
The Social Security Administration’s definition of disability, which describes how disabled you have to be before you’re eligible to receive benefits, is very strict, and most people get denied. In addition, it may take months or years to start receiving SSDI benefits. However, if you’re granted benefits, you’ll receive a lump-sum catch-up payment for every month the SSA spent processing your eligibility.
During the time you spent waiting for SSDI benefits, your LTDI benefits may have already started paying out. If your LTDI policy has the offset provision, you may have to pay all or part of the catch-up payment to the insurance company to offset the amount the company was obliged to pay you during that time.
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Say you pay premiums for a disability insurance policy worth $5,000 per month in benefits once you become disabled. Your policy has the offset provision, so you have to apply for SSDI as well.
But say you become eligible to receive LTDI benefits from the insurance company on June 1. You receive your first payout of $5,000 on July 1.
Meanwhile, your SSDI claim is still processing. It's approved later that year, for SSDI benefits of $1,000 per month. You receive a catch-up payout for each month you should’ve been receiving SSDI payments.
If your catch-up payment is three months’ worth ($3,000) and you’ve been receiving long-term disability insurance benefits for two months, you only owe the offset for those two months: $2,000. But, in this example, if you’ve been receiving LTDI benefits for three or more months, you’ll have to give the whole catch-up payment to the disability insurance company.
Additionally, once your SSDI benefits kick in, your LTDI benefits will be offset for every month. Now you'll receive $4,000 from the disability insurance company and $1,000 from the government.
You’ll also have to pay taxes on the SSDI benefits, reducing your overall benefits even further. (LTDI benefits are not taxed if you paid for them with after-tax income.) Prior to 2018, you could deduct the offset payment from your taxes, but this is no longer possible due to the major overhaul of U.S. tax law at the end of 2017. The Tax Cuts and Jobs Act removed all the miscellaneous deductions you could claim on your Schedule A.
If you receive SSDI, there is a possibility that you’ll have to pay back your benefits to the government. This only happens if an overpayment occurred. Essentially, either the SSA was paying you too much for your particular disability, or you started earning enough money to lose your eligibility for benefits but didn’t alert the government.
To avoid having to pay back a Social Security disability payment, you should alert the SSA if you recover in whole or in part from your disability. The SSA allows you to earn up to $1,350 per month ($2,260 if you’re blind) and still be eligible for benefits.  If you earn more than that, your benefits become an overpayment that you’ll be required to pay back by law.
If you’re told you’ve been receiving too much in SSDI benefits, you can always appeal the decision and prove that you’re still eligible for the original payout amount. Successful appeals may hinge on how the overpayment occurred and how much of a financial burden it would be to repay the overpayment.
You may also be able to negotiate a payment plan that amounts to a certain percentage of your income each month.
As with long-term disability insurance, if you keep receiving Social Security disability benefits despite being able-bodied, you could be fined or face prison time.