Too Much of a Good Thing?
“Too much of a good thing…” is primarily used to describe an abundance of something that has crossed the line from being beautiful, pleasant and interesting to being crass, disgusting, obnoxious or boring. Think the house on your block that covers the lawn with those 16-foot-tall inflatable Santa, Rudolph, Frosty AND their entire family, and then leave the display up until March. Or those ginormous sundaes with names like “Death by Ice Cream”, where you walk away without having to pay if you eat all 26 scoops by yourself without throwing up in the restaurant. Or the kid-friendly song “Baby Shark” on loop for a six-hour drive. It is not a phrase that one would think to apply to most government benefits, however. People who are elderly, or are children or have a significant disability and are poor besides genuinely need all the support these programs can offer. But if the benefit payments themselves are unlikely to be “too much,” the timing of the payments actually can wreak some havoc with disability planning.
If your disability is obvious and falls neatly into the criteria in the Social Security “Blue Book", then you will probably see your disability cash benefits begin within several months of you submitting your application. But for many people, particularly those with more invisible disabilities, it can take the Social Security Administration up to several YEARS to determine whether you are eligible for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) or both. Once they find in your favor, they will backpay your benefits to the date of application. This is a good thing. However, the backpay comes in lump sum form. This is where the “too much” part of what first appears to be a good thing comes in.
SSI and Medicaid are means-tested benefits (aka welfare). This means that you cannot earn too much and you cannot have too much in the bank if you want to qualify. Of course, SSI backpay does not count as income for SSI purposes. That would be circular. However, lump sum backpay that remains in the recipient’s bank account for more than nine months after it is received then becomes a “resource”. If your resources exceed $2,000, you risk losing both SSI and Medicaid, even though it was Social Security that paid you in the first place. So you need to spend down your backpay within that window of time or otherwise remove it from “countable” resources. SSI backpay is divided into several lump sums, each with its own nine-month horizon, so usually it is not too difficult to work with SSI. SSDI backpayments, however, arrive as one lump sum even when the payments cover several years. This can be a substantial amount SSDI itself does not have a resource limit, BUT some SSDI recipients also receive SSI and, more importantly, many also receive Medicaid. In such cases, it is imperative to have a plan to eliminate the entire backpay as a resource within the allotted single nine-month period.
If your disability determination is taking a while but you are reasonably sure it will succeed, think of all the large ticket items that you may need to buy that can spend down your backpay: furniture, technology, durable medical equipment, and even the security deposit on an apartment or the down payment on a car or a home. If it is permitted by the vendor, you can also use your backpay prepay future expenses. If you are living with someone else (for example, your parents), the homeowner can even charge you back rent for the period covered by your Social Security backpay—as long as the arrangement is presented at the time of application with mutual agreement, of course. If you do not want to spend down all of your backpay, you can put it into an ABLE account. Assets held in an ABLE account are not “countable” resources for Social Security and Medicaid eligibility purposes. However, ABLE accounts do have a $15,000 annual basic contribution limit.
There is also another monkey wrench that a significant backpayment can throw into your benefit machinery. People with disabilities who have received for 24 months SSDI, Social Security for Disabled Adult Children, Childhood Disability Benefit or Disabled Widow(er) benefits—collectively called “Title Two” disability benefits—are eligible for Medicare. There is no premium charged for Medicare Part A (hospital insurance), but there are premiums charged for Part B (medical insurance), part D (prescription drug insurance) and, sometimes, Part C. We will not deal here with Part C as it is a different kind of HMO-type animal. The premium charged for Part B and Part D may be subject to an Income-Related Monthly Adjustment Amount (IRMAA). This means, essentially, that Medicare participants with higher incomes will be asked to pay a higher premium than those with lower incomes. How much higher depends on the participant’s Modified Adjusted Gross Income (MAGI) as listed on their tax return from two or three years prior. To the extent SSSDI is taxable, it contributes to a tax-payer’s MAGI. A large backpayment in a single year can significantly increase MAGI and subject the Medicare participant later to a more aggressive IRMAA, even though the backpayment might pertain to prior tax years and have been long spent. For example, a backpayment I receive in 2018 might actually cover 2016 and 2017 as well if my application dated back to 2016. But it would generate higher IRMAA for me in 2020.
While the IRS has decreed that Social Security backpayment is taxable in the year received (if it is taxable at all), they have provided an alternative method to calculate whether and how much of the lump sum may be taxable. To calculate the taxable portion of any Social Security benefit, the taxpayer must add 50% of the value of that year’s benefits, paid to all other taxable income as well as non-taxable interest (say from municipal bonds). To the extent that the sum of those parts exceeds certain thresholds, up to 85% of the Social Security income is taxable and will contribute to MAGI. For Social Security backpay, the taxpayer can either figure the taxable amount of the lump sum, based on the other income for that current year; or the taxpayer can apportion the backpay to each year accrued and then calculate the taxable amount of each portion, based on the other income in each year accrued. This effectively spreads the impact of the lump sum on MAGI (and taxes) over more years even though the actual tax is paid altogether in the year the lump sum is paid. A reduced MAGI impact will also reduce potential IRMAA.
Country singer Alan Jackson has a very popular song: “Too much of a good thing…is a good thing.” When one has a contingency plan to manage the countable resources, taxes and MAGI that come with them, then Social Security Disability backpayments, meaning more money in your pocket, are definitely a good thing.